Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

Transcription

1 Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

2 Performance Measurement & the Planning & Control System The higher direction of an organization requires a clear vision, in general terms, of what the organization should be doing in the longer term and how it should go about doing it. This may be encapsulated in a mission statement.

3 Goals & Objectives A hierarchy of SMART goals and objectives cascades downwards from the mission statement, eventually providing the targets for the periodic budget process.

4 The Problem of Short-termism Short termism is when there is a bias towards short term rather than long term performance. It is often due to the fact that managers performance is measured on short term results.

5 Performance Measures Performance measure can be divided into two groups: Financial performance measures Non financial performance measures. Financial performance measure include profit, revenue, costs, share price and cash flow.

6 Performance Measures Non financial performance measures include product quality, reliability and customer satisfaction. Performance measures can be quantitative or qualitative. Non financial indicators (NFIs) are useful in a modern business environment.

7 Non Financial Indicators Changes in cost structures, the competitive environment and the manufacturing environment have lead to an increased uses of NFI s.

8 Critical Success Factor (CSF) A critical success factors is a performance requirement that is fundamental to competitive success. OR Critical success factors is the factors fundamental to strategic success.

9 Measuring Profitability & Productivity Profitability can be measured by return on investment (ROI) / return on capital employed (ROCE), profit margin, gross profit margin or cost/sales ration.

10 Return on Investment (ROI) ROI (also called return on capital employed) is calculated as ROI = profit / capital employed x 100% It shows how much profit has been made in relation to the amount of resources invested.

11 Exam Focus Point In an exam you may not be given the capital employed figure and you may be given several different profit figures. Capital employed = non-current assets + investment + current assets current liabilities.

12 Exam Focus Point Profit = operating profit before tax ROCE can also be calculated as : operating profit / (ordinary shareholders funds + non-current liabilities)

13 Profit Margin The profit margin (profit to sales ratio) is calculated as (profit / revenue) x 100%

14 Performance Measures Based on the Statement of Financial Position Asset turnover is a measure of how the assets of a business are being used to generate sales. It is calculated as (sales / capital employed) The current ratio is the standard test of liquidity and is the ratio of current assets to current liabilities. The quick ratio or acid test ratio is the ratio of current assets less inventories to current liabilities.

15 Accounts Receivable Collection Period The estimated average accounts receivable collection period is a rough measure of the average length of time it takes for a company s receivable to pay what they owe and is calculated as (trade receivable / sales) x 365 days or (trade receivable / sales) x 12 months

16 Inventory Turnover Period Inventory turnover period is a calculation of the number of days inventory is held for and is calculated as (inventory / cost of sales) x 365 days or (inventory / cost of sales) x 12 months

17 Accounts Payable Payment Period Accounts payable payment period or days provides a rough measure of the average length of time it takes a company to pay what it owes. It is ideally calculated by the formula (payables / purchases) x 365 days or (payables / purchases) x 12 months.

18 Working Capital Period The working capital period (or average age of working capital) identifies how long it takes to convert the purchases of inventories into cash from sales and is calculated as (working capital / cost of sales) x 365 days or (working capital / operating cost) x 365 days.

19 Debt & Gearing / Leverage Ratio Debt ratios are concerned with how much the company owes in relation to its size. Leverage is an alternative terms for gearing. Capital gearing is concerned with the amount of debt in a company s long term capital structure. Gearing ratio provides a long term measure of liquidity.

20 Debt & Gearing / Leverage Ratio Gearing ratio = prior charge capital (long-term debt)/prior charge capital + shareholders equity.

21 Interest Cover The interest cover ratio shows whether a company is earning enough profit before interest and tax to pay its interest costs comfortably. Interest cover = PBIT/Interest charge

22 External Consideration External conditions can affect performance. Organization need to know what is happening in its external environment. Broadly we talk about PEST.

23 Q & A