MBA Intensive Seminars 2004
FMA
Revision notes
MBA INTENSIVE

Page 1
Definition
Accounting is the process of
•identifying,
•measuring
•and communicating
•financial information about an entity...
The Accounting Equation
Assets minus Liabilities equals Equity
A
L
=
E
Assets equals Liabilities plus Equity
A
=
L
+
E
Equ...
Power of Accounting
“Accounting provides a very selective but powerful
representation of the corporate identity..”
“The de...
Creative Accounting?
“Things may exist independently of our accounts, but they
have no human existence until they become a...
You will discover
That accounting is subjective, partial and potentially
misleading
Accountants use language / numbers in ...
And there’s more….
The tribe of accountants takes many forms and lives
within all organisations
No such thing as a correct...
Roles of Accounting
Improve problem solving / decision making
Manage risks
Trust, Assurance
Educational - learn about orga...
Roles of Accountants
Assisting the internal management of organisations
Complying with external financial reporting,
contr...
Financial Accounting
Accounting concepts
Profit and Cash distinction
Financial statements
Organisational impact
MBA INTENS...
Hierarchy of Accounting Qualities
Decision Makers and their characteristics
Benefits > Costs
Understandability
Decision-Us...
Transactions
Buy materials on credit
from suppliers
Sell goods or services on
credit to customers
Pay suppliers
Receive ca...
When is profit reported?
When goods or services are sold
NOT
when cash is paid or received

MBA INTENSIVE

Page 13
Example: Antiques dealer
Buy 10 chairs for cash $200 each
Sell 6 chairs on credit $300 each
Profit 6 x $100 each = $600
Ca...
Profit, not cash
Matching Concept – match revenues received with
the costs incurred to generate them
Goods received but no...
Profit, not cash contd
Customers pay in advance for services extending
beyond the accounting period
Company agrees with su...
Change over a period
start

Assets - Liabilities = Equity

During the period
end

Profit/loss

Assets - Liabilities = Equi...
Contents of annual report
Financial highlights
Company overview
Chairman’s statement
Chief Executive’s review
Audit report...
The main financial statements
Balance
Sheet 1
AS AT

Balance
Sheet 2
AS AT

31 Dec Year 1

Profit and Loss
Account
For per...
Balance sheet horizontal
• Fixed assets

• Liabilities

• Current assets

• Shareholders’ funds

MBA INTENSIVE

Page 20
Balance sheet vertical
Fixed assets
Current assets
Less
Current liabilities
Less long term liabilities
Equals
Shareholders...
Profit and loss account
Revenue (sales)
Less Expenses (costs)
Equals Profit

MBA INTENSIVE

Page 22
Cash flow statement
Operating cash flows
plus
Investing cash flows
plus
Financing cash flows
Equals change in cash and ban...
Creative accounting
What do we want to create?
Less profit?

More profit?
More assets?
More liabilities?

Fewer assets?
Fe...
Creative Accounting Practices
Income smoothing – move profit from one year to
another
Changing accounting policies, partic...
Off-balance sheet financing , e.g leasing, Sale
and buyback, special purpose vehicles
Recognising profits that aren’t real...
Corporate crime / fraud
Directors are responsible for preventing crime and
fraud
They are required to have a system of int...
Corporate crime/ fraud contd.
Creating fictitious contracts
Fictitious Assets, inaccurate valuations
Omitting Liabilities,...
Analysis and
Interpretation of
Financial Statements

MBA INTENSIVE

Page 29
First Steps BC
(before calculation)
•
•
•
•
•

Why are you analysing accounts?
Who are you interpreting for?
When are you ...
Always bear in mind
• Preparers of accounts know how people will interpret
their accounts
• Be cynical – assume the accoun...
However….
• Accounts are main source of systematically produced
regulated information
• Good as it gets
• Usually reliable...
Analyse Accounts to determine
Is the company:
•Growing?

•Profitable?

•Managing its assets effectively?
•Sufficiently liq...
Financial ratios
• Quick and simple check on financial health
• Small number of ratios gives a picture of the
business. Ea...
Key areas for analysis
•
•
•
•
•

Profitability
Liquidity
Asset management
Debt management (financial structure)
Market va...
Success in making profit
Return on capital employed
profit
sales
Profit
_____
x _______
= __________
sales
total assets
to...
Managing liquidity
•
•
•
•
•
•

Can we pay the bills as they fall due?
Can we pay the wages of employees?
Buy stock (inven...
Asset management
•
•
•
•
•
•

Use fixed assets to earn sales revenue
Manage working capital
stocks (inventory)
debtors (ac...
Financial structure
• Is it a good idea to borrow?
• Creates greater risk - interest payments and
capital repayments
• Ben...
Advantages of ratios
•
•
•
•
•
•

Comparisons are relative to other figures
Compare businesses of different size
Gives pic...
Reasons for using ratios
•
•
•
•

Gives summary statistics
Helps identify industry benchmarks
Input to formal decision mod...
Applications of analysis
•
•
•
•

Predictions of corporate earnings
Construct projected financial statements
Predict corpo...
Problems with ratio analysis
• No agreement on definitions or specific set of
ratios
• Accounting estimation
• Data not av...
Limitations of ratio analysis
• Diverts attention from the underlying information
• May not give sufficient attention to t...
Creative accounting
Could involve:
• Inflating reported profits and EPS
• Accounting for losses via balance sheet reserves...
Survival Tips for Accounting Jungle
• Read the accounts backwards
• Read the accounting policies and compare
• Screen acco...
Return on Capital Employed
Profit before interest and taxation x 100
Shareholders’ funds plus long term debt
• Often calle...
Return on Capital Employed
Top line questions
• What increases/ decreases profit?
• Sales? Operating Costs?
Bottom line qu...
Return on Shareholders Funds
(also called Return on Equity)

Net profit after taxes x 100
Shareholders’ funds

MBA INTENSI...
Return on Shareholders Funds
Top line questions
• What increases/ decreases profit?
• Sales? Operating Costs?
• Interest c...
Net Profit Percentage
Net profit after taxes x 100
Sales
• Often shown as ‘Profit attributable to
ordinary shareholders’
•...
Net Profit Percentage
Top line questions
• Is gross profit high or low?
• What are the admin and selling costs?
• What are...
Gross Profit Percentage
Gross profit x 100
Sales
Gross profit = Sales minus cost of sales
Cost of sales = making ready for...
Gross Profit Percentage
Top line questions
• Have sales volumes or prices changed?
• Have costs of sales changed?
• Are co...
Current Ratio
Current Assets
Current Liabilities
Solvency = Ability to meet obligations as
they fall due
Working capital =...
Current Ratio
Top line questions
• What affects levels of stocks, debtors, cash
Bottom line questions
• What affects level...
Quick Ratio (Acid Test)
Current Assets less Stock
Current Liabilities
Solvency = Ability to meet obligations as
they fall ...
Quick Ratio (Acid Test)
Top line questions
• How is the company managing debtors and cash?
Bottom line questions
• How is ...
Stock Holding Period (days)
Stock x 365
Cost of Sales
• Change 365 to 12 for a calculation in months.
• Sales minus cost o...
Stock Holding Period (days)
Top line questions
• Year-end stock or average stock? Use year-end
for ease of calculation but...
Debtor Payment Period (days)
Trade Debtors x 365
Sales
• Debtors = Accounts receivable (customers
who buy on credit terms)...
Debtor Payment Period (days)
Top line questions

• Average or year-end? Year-end is less
trouble but check there are no ma...
Creditor Payment Period (days)
Trade Creditors x 365
Purchases or cost of sales
•Trade creditors = Accounts payable
(suppl...
Creditor Payment Period (days)
Top line questions

• Average or year-end?
Bottom line questions
• Opening stock + purchase...
Gearing
Long Term Debt
Long Term Debt plus Equity
• Look carefully at balance sheet and use
notes to accounts.
•Add Prefer...
Gearing
Top line question
• What are the sources of finance that create fixed
commitments to pay interest and repay capita...
Interest Cover
Profit before interest and tax
Interest expense
• EBIT = Earnings Before Interest and Taxation
• Interest e...
Interest Cover
Top line questions
• What is the amount of profit available to ‘cover’
interest payments?
• Is the company ...
Concepts, Cost and Costing

MBA INTENSIVE

Page 69
Management accounting
•
•
•
•
•
•

Integral part of management
identify, present and interpret information
for strategy, p...
Management accounting (contd)
•
•
•
•
•
•

Internal use within organisation
No regulation by law
Projections for future
An...
Measuring and
analysing
performance
Implementing
plans

Examining future
environment

Action plans and budgets
Operating p...
Importance of costing
• Many organisational decisions rely on costings
• Costing is complex but essential
• “An accountant...
Describing costs
• Direct (identified with a saleable unit)
• Indirect (spread across saleable units)
• Indirect costs = O...
Confusing terminology
• Allocate = give all cost to one unit or centre
• Apportion = share across units or centres
• Absor...
Terminology (contd)
• What are the direct costs? Allocate these to units
of output
• What are the indirect costs? Allocate...
Absorption bases
Absorb as
• cost per unit
• cost per labour hour
• cost per £ of labour
• cost per kilo of material
• cos...
Cost behaviour
Pairs of classifications
• Direct or indirect?
• Fixed or variable?
• Period or product?
Case: Bus company ...
Direct or indirect?
Direct for each school:
Driver’s working time, fuel for bus, bridge tolls
Indirect to spread across al...
Fixed or variable?
Variable change with activity level
Fuel, repairs, bridge tolls
Fixed regardless of activity level
Driv...
Period or product?
What is the product?
A person-mile.
Product costs
Driver’s time, fuel, bridge tolls
Period costs
Insura...
Examples of decisions
•
•
•
•
•
•
•
•

Price setting, tendering for contracts
Product profitability analysis
Product desig...
Short-term decisions
In the short term business can continue if the selling
price covers variable costs and makes a
contri...
Contribution analysis
Break even point =
Fixed costs
Contribution per unit
Pay £1,000 rent for market stall. Buy toys for ...
Contribution analysis (contd)
Sell 500 at £8 = £4,000.
Variable cost 500 x £6 = £3,000
Add fixed costs £1,000
Neither prof...
Scarce resources
Sell gardening services and house cleaning.
Contribution per job £10 and £8.
Gardening needs 2 hours per ...
Short term decisions
•
•
•
•

Make internally or buy externally
Hire own staff or pay agency for outsourcing
Keep a busine...
Other factors in decisions
Not just an accounting matter. Consider
• organisation’s objectives
• relationship with employe...
Get the costs wrong and...
•Set prices too high - lose sales;
too low - sell products at loss
•Lose potentially profitable...
Get the costs wrong and...
•R & D to create ‘better’ product when none
needed
•Product Design Modifications not done when
...
Different Costs for Different
Purposes
Not a single, universal ‘true’ cost.
Appropriate cost is governed by:
Needs of mana...
Different Costs for Different Purposes
Activity Based
Cost
Average Cost
Avoidable Cost
Budgeted Cost
Controllable
Cost
Cur...
Costing Problem
•In contemporary organisations the fixed/variable
classification is not relevant
•Logical impossibility of...
Activity ‘Solution’
Costs don’t drive activities, activities cause costs
Organisations do things that consume resources
an...
Activity Based Costing
•
•
•
•
•

What are the activities of the organisation?
What resources are used by each activity?
H...
Money
cost

Resources
consume
Collect
Data

Activities
produce

Non-financial
Performance
Analysis

Outputs
creates

Value...
Benefits of ABC
• Makes visible the activities that drive the costs
• Prevents misallocation of costs
• Links costs more c...
Activity costing is...
•Not based on accounting coding structures
•Not based on accounting time frames
•Not based on techn...
Short term planning

Budgets and
Budgetary Control
MBA INTENSIVE

Page 99
What is a budget?
•
•
•
•

Quantified format
management plans and strategies
for decision making
communication medium

MBA...
Mission/ goals
Financial plans

Assessed market
opportunities/
organisational
capability

Corporate objectives
Long term
s...
Long term strategy
Market
opportunities

Long term planning

Short term strategy
Organisational
capability

Budget/ short ...
Budget process
•
•
•
•
•

Formalises planning and control
Defines goals
Goal congruence - brings goals together
Authority ...
operating

Master budget

Sales budget

financial

Capital budget

+

Cost of goods sold budget
+

Development /design bud...
Budget preparation
•Start with sales budget (demand driven)
•Then match with cost of sales
•Is this a production organisat...
Budget preparation (contd)
• Is this a service organisation?
Plan service programme, labour needs, materials
needed
• Plan...
Cash budget
•
•
•
•
•

Most important part of budget cycle
Monthly, quarterly?
Cash receipts from operations
Cash payments...
Fixed and flexible budgets
• Fixed means that budget is not adjusted later if
volumes start to vary
• Flexible budgets mea...
Fixed and flexible (contd)
Budget variable costs of £200,000 for 5,000 units of
output
Actual variable costs are £195,000 ...
Fixed and flexible (contd)
Appears to have saved £5,000
But budgeted cost = £4 per unit
So flexible budget for 4,500 is £1...
Alternative approaches
Easy approach = Last year plus inflation
Zero-based budgeting
• Start with a clean sheet
• Justify ...
Alternative approaches (contd)
Activity based budgeting
• Extension of activity based costing
• Focus on cost of each acti...
Not-for-profit organisations
• Goals and objectives measured differently
• Need to be cost effective
Planning programming ...
Behavioural aspects
Budgets can motivate employees to achieve goals of
the organisation. What helps?
• degree of difficult...
Not foolproof
Why might budgets fail?
• Fail to understand changing environment
• using unsuitable existing structures
• f...
Are budgets necessary?
What matters is PLANNING
This does not have to use budgets. Essential:
• Set targets: to maximise l...
Are budgets necessary?
•
•
•
•
•
•

Co-ordination: manage cause and effect
Cost management: challenge all costs
Forecastin...
Performance Measurement

MBA INTENSIVE

Page 118
Strategic planning
Five year plan, rolling forward.
• Profitability
• Growth of sales, profit
• Market share
• Customer sa...
Accounting-based performance
measures
Profit?
• Could compare actual profit against budget, but
companies don’t give infor...
Accounting-based performance
measures (contd)
Profitability
• A relative measure, better for comparison.
• Calculate for s...
Return on capital employed
Profit before interest and taxes
Fixed assets plus current assets less current
liabilities
Can ...
Return on shareholders’ funds
Net profit after interest and taxation
Shareholders’ funds
Can only be calculated for the co...
Residual income
Ask: What is the income (profit) remaining after
deducting a notional interest charge for the use of
capit...
Residual income (contd)
Suppose cost of capital is 10% for both.
X
Z
£000’s
Operating profit (EBIT) 18
1,500
Less interest...
Economic Value Added (EVA)
Companies should deliver value that exceeds the
cost of capital.
X
Z
Profit after tax (before i...
Performance of a division
Divisions are created by decentralisation
• Gives greater responsiveness
• Allows faster decisio...
Performance of a division (contd)
Problems of decentralisation
• Focus on division, not on total organisation
(Called ‘dys...
Performance of a division (contd)
Cost centre
• Manager is responsible for costs
Discretionary cost centre
• Manager has s...
Performance of a division (contd)
Profit centre
• Manager is responsible for revenues and costs
• Target profit is set
Inv...
Transfer pricing
What price is charged for transfers between
divisions within an organisation?
• Variable cost?
• Variable...
Financial Performance
Measurement
• Success / Failure often determined by accounting
numbers
• Growth in profit, ROCE, Sal...
Financial Performance Measurement
(contd)
•
•
•
•

Achieving outcome at or under budget
Adverse / Favourable variance anal...
Problem with financial measures
A Simple Scenario.
Division in large company enjoyed major growth in
profitability over tw...
Financial measures (contd)
Top line answer
• Division’s market share dropped
• Costs were reduced by reducing maintenance ...
Problems with financial information
• Complexity /mystery and the method of
calculation
• Arbitrary treatment of some cost...
Problems with financial information
(contd)
• Managers need to convert data into meaningful
information.
• Implied assumpt...
Value of Financial Performance
Measurement
• Managers accept importance of financial outcome
of their function (especially...
Value of Financial Performance
Measurement (contd)
• Need information on relationships between
activities they control and...
Information Managers Use
US study concluded information used for daily
operating control did not come from the budgeting
s...
Indicators for managers
 level of finished goods
 level of orders (demand)
 key production limiting factors
 simple co...
Indicators for managers (contd)
 scrap quantities,
 rework rates.
 capacity utilisation
 physical production requireme...
Non-Financial Measures
Non-financial is any information not valued in £s.
It has the following advantages:
• Expressed in ...
Non-Financial Measures (contd)
• Potentially quicker, relevant
• Relates to events, activities, actual observable
performa...
Integrating Non-£ and £ measures
•
•
•
•
•
•

Activity Based Accounting
Benchmarking
Performance Scoring
Balanced Scorecar...
Balanced Scorecard
Financial Perspective

Customer Perspective

Vision and
Strategy

Internal Business
Perspective

Learni...
Balanced Scorecard
• systematic attempt to design performance
measurement system that integrates
– organisational objectiv...
Balanced Scorecard (contd)
• reflect the organisation’s understanding of the
causes of successful performance.
• monitorin...
Balanced Scorecard (contd)
BS performance measures should
• be clearly understood by all employees
• link manufacturing pe...
Balanced Scorecard (contd)
BS performance measures should
• be able to identify cause-effect relations to enable
employees...
Not-for-profit organisations
• Economy
Cost at which resources are acquired
• Efficiency
Compare inputs and outputs
• Effe...
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Accounting34

  1. 1. MBA Intensive Seminars 2004 FMA Revision notes MBA INTENSIVE Page 1
  2. 2. Definition Accounting is the process of •identifying, •measuring •and communicating •financial information about an entity •to permit informed judgments and decisions •by users of the information. MBA INTENSIVE Page 2
  3. 3. The Accounting Equation Assets minus Liabilities equals Equity A L = E Assets equals Liabilities plus Equity A = L + E Equity Capital Ownership claim Shareholders’ funds MBA INTENSIVE Page 3
  4. 4. Power of Accounting “Accounting provides a very selective but powerful representation of the corporate identity..” “The detailed language of assets, liabilities, costs, profits provide a range of corporate imagery and vocabulary …….” “Accounting provides the categories through which organisational participants perceive both themselves and the organisation.” Mike Powers MBA INTENSIVE Page 4
  5. 5. Creative Accounting? “Things may exist independently of our accounts, but they have no human existence until they become accountable. They may not exist, but they take on human significance by becoming accountable..” “Accounts define reality and at the same time they are that reality….” “Accounts do not more or less accurately describe things. Instead they establish what is accountable in the setting in which they occur” “Whether they are ACCURATE OR INACCURATE by some other standards, accounts define reality for a situation in the sense that people act on the basis of what is accountable in the situation of their action.” Ruth Hines MBA INTENSIVE Page 5
  6. 6. You will discover That accounting is subjective, partial and potentially misleading Accountants use language / numbers in a highly technical way Accounts are a highly stylised story, representation, description of organisational events Differences between the ‘Accounting World’ and the ‘Organisational World’ Problematic nature of accounting numbers MBA INTENSIVE Page 6
  7. 7. And there’s more…. The tribe of accountants takes many forms and lives within all organisations No such thing as a correct ‘cost’, ‘value’, ‘profit’..it all depends on context The value of accounting in managing organisations MBA INTENSIVE Page 7
  8. 8. Roles of Accounting Improve problem solving / decision making Manage risks Trust, Assurance Educational - learn about organisations Language of business Construct, define, measure success/failure MBA INTENSIVE Page 8
  9. 9. Roles of Accountants Assisting the internal management of organisations Complying with external financial reporting, controls and with taxation regulations Expert consultants on financial and organisational performance MBA INTENSIVE Page 9
  10. 10. Financial Accounting Accounting concepts Profit and Cash distinction Financial statements Organisational impact MBA INTENSIVE Page 10
  11. 11. Hierarchy of Accounting Qualities Decision Makers and their characteristics Benefits > Costs Understandability Decision-Usefulness Relevance Predictive value Reliability Timeliness Feedback Value Verifiability Comparability & consistency Representational Faithfulness Neutrality Materiality MBA INTENSIVE Page 11
  12. 12. Transactions Buy materials on credit from suppliers Sell goods or services on credit to customers Pay suppliers Receive cash MBA INTENSIVE Page 12
  13. 13. When is profit reported? When goods or services are sold NOT when cash is paid or received MBA INTENSIVE Page 13
  14. 14. Example: Antiques dealer Buy 10 chairs for cash $200 each Sell 6 chairs on credit $300 each Profit 6 x $100 each = $600 Cash flow = minus $2,000 MBA INTENSIVE Page 14
  15. 15. Profit, not cash Matching Concept – match revenues received with the costs incurred to generate them Goods received but not paid for –Creditors (Payables) Goods or services supplied but no cash yet - Debtors (Receivables) Prudence concept – providing for known / probable losses – e.g. Doubtful debts, Depreciation of fixed assets MBA INTENSIVE Page 15
  16. 16. Profit, not cash contd Customers pay in advance for services extending beyond the accounting period Company agrees with supplier to buy materials at fixed price for 5 years Home currency euros, borrow in dollars Increase in valuation of fixed assets MBA INTENSIVE Page 16
  17. 17. Change over a period start Assets - Liabilities = Equity During the period end Profit/loss Assets - Liabilities = Equity MBA INTENSIVE Page 17
  18. 18. Contents of annual report Financial highlights Company overview Chairman’s statement Chief Executive’s review Audit report Financial statements Notes to the accounts MBA INTENSIVE Page 18
  19. 19. The main financial statements Balance Sheet 1 AS AT Balance Sheet 2 AS AT 31 Dec Year 1 Profit and Loss Account For period Cash Flow Report Balance Sheet 3 AS AT 31 Dec Year 2 31 Dec Year 3 Profit and Loss Account For period Cash Flow Report MBA INTENSIVE Page 19
  20. 20. Balance sheet horizontal • Fixed assets • Liabilities • Current assets • Shareholders’ funds MBA INTENSIVE Page 20
  21. 21. Balance sheet vertical Fixed assets Current assets Less Current liabilities Less long term liabilities Equals Shareholders’ funds MBA INTENSIVE Page 21
  22. 22. Profit and loss account Revenue (sales) Less Expenses (costs) Equals Profit MBA INTENSIVE Page 22
  23. 23. Cash flow statement Operating cash flows plus Investing cash flows plus Financing cash flows Equals change in cash and bank loans MBA INTENSIVE Page 23
  24. 24. Creative accounting What do we want to create? Less profit? More profit? More assets? More liabilities? Fewer assets? Fewer liabilities? MBA INTENSIVE Page 24
  25. 25. Creative Accounting Practices Income smoothing – move profit from one year to another Changing accounting policies, particularly depreciation, asset valuations Overstating costs, particularly in regulated industries Making expenses into Assets - ‘capitalisation’ MBA INTENSIVE Page 25
  26. 26. Off-balance sheet financing , e.g leasing, Sale and buyback, special purpose vehicles Recognising profits that aren’t really there – foreign exchange rates affecting values of assets and loans Corporate takeovers – ACCOUNTING MINEFIELD adjusting policies, fair values, goodwill, brands, reorganisation costs……... MBA INTENSIVE Page 26
  27. 27. Corporate crime / fraud Directors are responsible for preventing crime and fraud They are required to have a system of internal controls Who controls executive directors for honesty/? Audit committees, Non-executive Directors, Supervisory Board MBA INTENSIVE Page 27
  28. 28. Corporate crime/ fraud contd. Creating fictitious contracts Fictitious Assets, inaccurate valuations Omitting Liabilities, misleading valuations Raid the employees’ pension fund MBA INTENSIVE Page 28
  29. 29. Analysis and Interpretation of Financial Statements MBA INTENSIVE Page 29
  30. 30. First Steps BC (before calculation) • • • • • Why are you analysing accounts? Who are you interpreting for? When are you interpreting? What are you intending to interpret? Limitations of Financial Accounts MBA INTENSIVE Page 30
  31. 31. Always bear in mind • Preparers of accounts know how people will interpret their accounts • Be cynical – assume the accounts are the best possible picture • Analysis only as good as original data – • Never just use accounts – check from many different sources • Accounting terms are different from general understandings MBA INTENSIVE Page 31
  32. 32. However…. • Accounts are main source of systematically produced regulated information • Good as it gets • Usually reliable – 3rd party verified • Follow the same basic rules • Most of the information is there (in the small print) • You can never eliminate the risk of fraud / criminal misrepresentation MBA INTENSIVE Page 32
  33. 33. Analyse Accounts to determine Is the company: •Growing? •Profitable? •Managing its assets effectively? •Sufficiently liquid? •Financed properly? •Able to meet its financial obligations? •Viewed favourably by financial markets? MBA INTENSIVE Page 33
  34. 34. Financial ratios • Quick and simple check on financial health • Small number of ratios gives a picture of the business. Easy to calculate, harder to interpret. • Provide a starting point for further investigation. MBA INTENSIVE Page 34
  35. 35. Key areas for analysis • • • • • Profitability Liquidity Asset management Debt management (financial structure) Market value MBA INTENSIVE Page 35
  36. 36. Success in making profit Return on capital employed profit sales Profit _____ x _______ = __________ sales total assets total assets profitability x efficiency = MBA INTENSIVE ROCE Page 36
  37. 37. Managing liquidity • • • • • • Can we pay the bills as they fall due? Can we pay the wages of employees? Buy stock (inventory) on credit Sell on credit = accounts receivable Pay suppliers = accounts payable Ideally, match cash flows in and out MBA INTENSIVE Page 37
  38. 38. Asset management • • • • • • Use fixed assets to earn sales revenue Manage working capital stocks (inventory) debtors (accounts receivable) creditors (accounts payable) working capital cycle MBA INTENSIVE Page 38
  39. 39. Financial structure • Is it a good idea to borrow? • Creates greater risk - interest payments and capital repayments • Benefits to shareholders when profits are rising • Risks to shareholders when profits are falling MBA INTENSIVE Page 39
  40. 40. Advantages of ratios • • • • • • Comparisons are relative to other figures Compare businesses of different size Gives picture of company strategy Financial and trading performance Compare with industry averages Simple summary of complex information MBA INTENSIVE Page 40
  41. 41. Reasons for using ratios • • • • Gives summary statistics Helps identify industry benchmarks Input to formal decision model Standardise for size MBA INTENSIVE Page 41
  42. 42. Applications of analysis • • • • Predictions of corporate earnings Construct projected financial statements Predict corporate failure Indicators of financial distress e.g. Altman’s models, combination of ratios MBA INTENSIVE Page 42
  43. 43. Problems with ratio analysis • No agreement on definitions or specific set of ratios • Accounting estimation • Data not available • Timing of data does not match • Differing accounting policies • Negative numbers and small divisors MBA INTENSIVE Page 43
  44. 44. Limitations of ratio analysis • Diverts attention from the underlying information • May not give sufficient attention to the notes to the accounts • Accounting policies may affect comparison • Industry differences MBA INTENSIVE Page 44
  45. 45. Creative accounting Could involve: • Inflating reported profits and EPS • Accounting for losses via balance sheet reserves and all profits through P & L • Reporting profits without generating equivalent cash • Reporting lower borrowings MBA INTENSIVE Page 45
  46. 46. Survival Tips for Accounting Jungle • Read the accounts backwards • Read the accounting policies and compare • Screen accounts using filters – e.g. high profit low tax, changing depreciation policies • Cash is King (or Queen) • Assess risk: If in doubt, keep out (or get out) MBA INTENSIVE Page 46
  47. 47. Return on Capital Employed Profit before interest and taxation x 100 Shareholders’ funds plus long term debt • Often called ‘Operating profit’ Assets minus Liabilities = Equity • Total assets minus current liabilities equals Shareholders’ funds plus long term loans MBA INTENSIVE Page 47
  48. 48. Return on Capital Employed Top line questions • What increases/ decreases profit? • Sales? Operating Costs? Bottom line questions • Recent increases in assets may not yet have created profit • Is there any debt ‘off balance sheet’? MBA INTENSIVE Page 48
  49. 49. Return on Shareholders Funds (also called Return on Equity) Net profit after taxes x 100 Shareholders’ funds MBA INTENSIVE Page 49
  50. 50. Return on Shareholders Funds Top line questions • What increases/ decreases profit? • Sales? Operating Costs? • Interest charges? Taxes? Bottom line questions • Is the company high/ low geared? MBA INTENSIVE Page 50
  51. 51. Net Profit Percentage Net profit after taxes x 100 Sales • Often shown as ‘Profit attributable to ordinary shareholders’ • Sales also called ‘turnover’ MBA INTENSIVE Page 51
  52. 52. Net Profit Percentage Top line questions • Is gross profit high or low? • What are the admin and selling costs? • What are the effects of interest and taxation? Bottom line questions • Is the measurement of sales explained? MBA INTENSIVE Page 52
  53. 53. Gross Profit Percentage Gross profit x 100 Sales Gross profit = Sales minus cost of sales Cost of sales = making ready for sale MBA INTENSIVE Page 53
  54. 54. Gross Profit Percentage Top line questions • Have sales volumes or prices changed? • Have costs of sales changed? • Are costs of sales mainly variable or fixed? Bottom line questions • Is the measurement of sales explained? MBA INTENSIVE Page 54
  55. 55. Current Ratio Current Assets Current Liabilities Solvency = Ability to meet obligations as they fall due Working capital = CA minus CL MBA INTENSIVE Page 55
  56. 56. Current Ratio Top line questions • What affects levels of stocks, debtors, cash Bottom line questions • What affects levels of bank borrowing, trade creditors, other short term creditors Overall - How does the company manage its working capital? MBA INTENSIVE Page 56
  57. 57. Quick Ratio (Acid Test) Current Assets less Stock Current Liabilities Solvency = Ability to meet obligations as they fall due Cash flow: How does the company manage inflows and outflows of cash? MBA INTENSIVE Page 57
  58. 58. Quick Ratio (Acid Test) Top line questions • How is the company managing debtors and cash? Bottom line questions • How is the company managing trade creditors and bank overdraft? MBA INTENSIVE Page 58
  59. 59. Stock Holding Period (days) Stock x 365 Cost of Sales • Change 365 to 12 for a calculation in months. • Sales minus cost of sales equals gross profit MBA INTENSIVE Page 59
  60. 60. Stock Holding Period (days) Top line questions • Year-end stock or average stock? Use year-end for ease of calculation but check there are no significant changes from start. Bottom line questions • May have to make some approximations to get cost of sales MBA INTENSIVE Page 60
  61. 61. Debtor Payment Period (days) Trade Debtors x 365 Sales • Debtors = Accounts receivable (customers who buy on credit terms) •Use notes to the accounts to find trade debtors. MBA INTENSIVE Page 61
  62. 62. Debtor Payment Period (days) Top line questions • Average or year-end? Year-end is less trouble but check there are no major changes. Bottom line questions • Are all sales made for credit? Think about the nature of the business. MBA INTENSIVE Page 62
  63. 63. Creditor Payment Period (days) Trade Creditors x 365 Purchases or cost of sales •Trade creditors = Accounts payable (suppliers who provide goods on credit terms) • Use notes to the accounts for detail. • MBA INTENSIVE Page 63
  64. 64. Creditor Payment Period (days) Top line questions • Average or year-end? Bottom line questions • Opening stock + purchases - closing stock = Cost of goods sold. • Should be Purchases but Cost of goods sold is Ok if stocks are constant. MBA INTENSIVE Page 64
  65. 65. Gearing Long Term Debt Long Term Debt plus Equity • Look carefully at balance sheet and use notes to accounts. •Add Preference shares to Debt •Omit Provisions MBA INTENSIVE Page 65
  66. 66. Gearing Top line question • What are the sources of finance that create fixed commitments to pay interest and repay capital? Bottom line question • What is the total long-term financing of the business, based on borrowings and equity? MBA INTENSIVE Page 66
  67. 67. Interest Cover Profit before interest and tax Interest expense • EBIT = Earnings Before Interest and Taxation • Interest expense: either in profit and loss account or in detailed notes. MBA INTENSIVE Page 67
  68. 68. Interest Cover Top line questions • What is the amount of profit available to ‘cover’ interest payments? • Is the company generating sufficient wealth to meet interest payments? Bottom line questions • What is the cost of servicing borrowings? MBA INTENSIVE Page 68
  69. 69. Concepts, Cost and Costing MBA INTENSIVE Page 69
  70. 70. Management accounting • • • • • • Integral part of management identify, present and interpret information for strategy, planning and control, for decision taking and use of resources for disclosure to employees to safeguard assets MBA INTENSIVE Page 70
  71. 71. Management accounting (contd) • • • • • • Internal use within organisation No regulation by law Projections for future Analysis of past Directing attention, planning and control Solving problems MBA INTENSIVE Page 71
  72. 72. Measuring and analysing performance Implementing plans Examining future environment Action plans and budgets Operating plans Developing objectives Formulating strategy MBA INTENSIVE Page 72
  73. 73. Importance of costing • Many organisational decisions rely on costings • Costing is complex but essential • “An accountant knows the cost of everything but the value of nothing” Oscar Wilde MBA INTENSIVE Page 73
  74. 74. Describing costs • Direct (identified with a saleable unit) • Indirect (spread across saleable units) • Indirect costs = Overheads • How to find a fair way of spreading the overheads? MBA INTENSIVE Page 74
  75. 75. Confusing terminology • Allocate = give all cost to one unit or centre • Apportion = share across units or centres • Absorb (Absorption) Soak up into the units of output See page 142 of text book MBA INTENSIVE Page 75
  76. 76. Terminology (contd) • What are the direct costs? Allocate these to units of output • What are the indirect costs? Allocate to cost centres if we know where they belong. • Otherwise Apportion (share) across cost centres. • Absorb costs from production centres into products. MBA INTENSIVE Page 76
  77. 77. Absorption bases Absorb as • cost per unit • cost per labour hour • cost per £ of labour • cost per kilo of material • cost per machine hour Different bases give different answers MBA INTENSIVE Page 77
  78. 78. Cost behaviour Pairs of classifications • Direct or indirect? • Fixed or variable? • Period or product? Case: Bus company sends buses to 10 schools for taking children home each day. How does the company describe the costs? MBA INTENSIVE Page 78
  79. 79. Direct or indirect? Direct for each school: Driver’s working time, fuel for bus, bridge tolls Indirect to spread across all journeys: Insurance, repairs, maintenance, licences, depreciation, driver’s idle time, holiday pay MBA INTENSIVE Page 79
  80. 80. Fixed or variable? Variable change with activity level Fuel, repairs, bridge tolls Fixed regardless of activity level Drivers’ wages, Insurance, Licences, Maintenance checks, Depreciation MBA INTENSIVE Page 80
  81. 81. Period or product? What is the product? A person-mile. Product costs Driver’s time, fuel, bridge tolls Period costs Insurance, Licences, routine maintenance, depreciation MBA INTENSIVE Page 81
  82. 82. Examples of decisions • • • • • • • • Price setting, tendering for contracts Product profitability analysis Product design modifications R & D management Value Engineering General Cost Management Contracting out / Buying in Plant / Department Closure MBA INTENSIVE Page 82
  83. 83. Short-term decisions In the short term business can continue if the selling price covers variable costs and makes a contribution to fixed costs. Contribution = Selling price - variable cost MBA INTENSIVE Page 83
  84. 84. Contribution analysis Break even point = Fixed costs Contribution per unit Pay £1,000 rent for market stall. Buy toys for £6 each, sell for £8 each. What is breakeven volume? £1,000/£2 = 500 toys MBA INTENSIVE Page 84
  85. 85. Contribution analysis (contd) Sell 500 at £8 = £4,000. Variable cost 500 x £6 = £3,000 Add fixed costs £1,000 Neither profit nor loss How many toys to sell for profit of £4,000? £(1,000 + 4,000)/£2 = 2,500 toys MBA INTENSIVE Page 85
  86. 86. Scarce resources Sell gardening services and house cleaning. Contribution per job £10 and £8. Gardening needs 2 hours per job, House cleaning needs 1 hour per job. Shortage of labour. Which has priority? House cleaning £8 per hour, Gardening £4 per hour. Contribution per unit of limiting factor MBA INTENSIVE Page 86
  87. 87. Short term decisions • • • • Make internally or buy externally Hire own staff or pay agency for outsourcing Keep a business activity going Take on a special order at lower price MBA INTENSIVE Page 87
  88. 88. Other factors in decisions Not just an accounting matter. Consider • organisation’s objectives • relationship with employees • marketing • corporate goodwill/ image • customer reactions • government policies MBA INTENSIVE Page 88
  89. 89. Get the costs wrong and... •Set prices too high - lose sales; too low - sell products at loss •Lose potentially profitable contracts, win loss making contracts •Don’t know where we are making / losing money •Continue with loss making products, cut profit making products, sub-optimal product mix MBA INTENSIVE Page 89
  90. 90. Get the costs wrong and... •R & D to create ‘better’ product when none needed •Product Design Modifications not done when needed •Contracting out production that costs more than internal production •Making products that could be cheaper to buy in •Close profit-making Plant / Keep open loss making plant MBA INTENSIVE Page 90
  91. 91. Different Costs for Different Purposes Not a single, universal ‘true’ cost. Appropriate cost is governed by: Needs of management Specific organisational situations Specific problem to be solved Available information - pragmatics MBA INTENSIVE Page 91
  92. 92. Different Costs for Different Purposes Activity Based Cost Average Cost Avoidable Cost Budgeted Cost Controllable Cost Current Cost Direct Cost Environmental Cost Engineered Cost Fixed Cost Failure Cost Planned Cost Full Cost Historic Cost Incremental Cost Indirect Cost Product Cost Quality Cost Relevant Cost Joint Cost Marginal Cost Opportunity Cost Overhead Cost Period Cost Sunk Cost Standard Cost Total Cost MBA INTENSIVE Step Cost Transfer Cost Variable Cost Page 92
  93. 93. Costing Problem •In contemporary organisations the fixed/variable classification is not relevant •Logical impossibility of attributing all costs to products •Wrong approach to the problem •‘Solution’ based in the ‘accounting world’ not the ‘organisational world’ MBA INTENSIVE Page 93
  94. 94. Activity ‘Solution’ Costs don’t drive activities, activities cause costs Organisations do things that consume resources and (should) create value Costing should start with what the firm does activities in organisational world MBA INTENSIVE Page 94
  95. 95. Activity Based Costing • • • • • What are the activities of the organisation? What resources are used by each activity? How much does each resource cost? Collect cost in ‘cost pools’ How does each product or service make use of each activity? • Share cost from the cost pools. MBA INTENSIVE Page 95
  96. 96. Money cost Resources consume Collect Data Activities produce Non-financial Performance Analysis Outputs creates Value MBA INTENSIVE Page 96
  97. 97. Benefits of ABC • Makes visible the activities that drive the costs • Prevents misallocation of costs • Links costs more closely to responsibility for causing costs BUT does not save money or generate profit. It only gives more accurate information MBA INTENSIVE Page 97
  98. 98. Activity costing is... •Not based on accounting coding structures •Not based on accounting time frames •Not based on techniques designed to make the accountants life easier •Not based on producing Financial Statements MBA INTENSIVE Page 98
  99. 99. Short term planning Budgets and Budgetary Control MBA INTENSIVE Page 99
  100. 100. What is a budget? • • • • Quantified format management plans and strategies for decision making communication medium MBA INTENSIVE Page 100
  101. 101. Mission/ goals Financial plans Assessed market opportunities/ organisational capability Corporate objectives Long term strategy Assumptions on critical factors Long term plans MBA INTENSIVE Page 101
  102. 102. Long term strategy Market opportunities Long term planning Short term strategy Organisational capability Budget/ short term planning MBA INTENSIVE Forecasting assumptions Modify assumptions Page 102
  103. 103. Budget process • • • • • Formalises planning and control Defines goals Goal congruence - brings goals together Authority and responsibility are clear Framework to judge performance MBA INTENSIVE Page 103
  104. 104. operating Master budget Sales budget financial Capital budget + Cost of goods sold budget + Development /design budget Cash budget + Marketing budget + Distribution budget + Administration budget Budgeted profit and loss account MBA INTENSIVE Budgeted balance sheet Budgeted statement of cash flow Page 104
  105. 105. Budget preparation •Start with sales budget (demand driven) •Then match with cost of sales •Is this a production organisation? Plan: inventories of raw materials, finished goods purchases to cover sales and inventories MBA INTENSIVE Page 105
  106. 106. Budget preparation (contd) • Is this a service organisation? Plan service programme, labour needs, materials needed • Plan all other operating expenses • Plan capital expenditure • Bring together in cash budget, budgeted profit and loss account, balance sheet. MBA INTENSIVE Page 106
  107. 107. Cash budget • • • • • Most important part of budget cycle Monthly, quarterly? Cash receipts from operations Cash payments for operations Other cash receipts (new finance, sale of fixed assets) • Other cash payments (tax, dividends, interest) MBA INTENSIVE Page 107
  108. 108. Fixed and flexible budgets • Fixed means that budget is not adjusted later if volumes start to vary • Flexible budgets means that budget is adjusted to take account of change in volumes of activity over the period MBA INTENSIVE Page 108
  109. 109. Fixed and flexible (contd) Budget variable costs of £200,000 for 5,000 units of output Actual variable costs are £195,000 for 4,500 units of output How has manager performed against budget? MBA INTENSIVE Page 109
  110. 110. Fixed and flexible (contd) Appears to have saved £5,000 But budgeted cost = £4 per unit So flexible budget for 4,500 is £180,000 Performance is £15,000 worse than flexible budget. MBA INTENSIVE Page 110
  111. 111. Alternative approaches Easy approach = Last year plus inflation Zero-based budgeting • Start with a clean sheet • Justify every item • Focus on goals and objectives MBA INTENSIVE Page 111
  112. 112. Alternative approaches (contd) Activity based budgeting • Extension of activity based costing • Focus on cost of each activity Kaizen budgeting • continuous improvement • budget is achieved if improvements are met MBA INTENSIVE Page 112
  113. 113. Not-for-profit organisations • Goals and objectives measured differently • Need to be cost effective Planning programming budget system • Focus on outputs rather than inputs • ‘joined-up’ government MBA INTENSIVE Page 113
  114. 114. Behavioural aspects Budgets can motivate employees to achieve goals of the organisation. What helps? • degree of difficulty • top management participation • perceived fairness • feeling of ownership • avoid discontent about preparation MBA INTENSIVE Page 114
  115. 115. Not foolproof Why might budgets fail? • Fail to understand changing environment • using unsuitable existing structures • fail to understand business systems • lack of senior management support • fail to understand central role of budgeting MBA INTENSIVE Page 115
  116. 116. Are budgets necessary? What matters is PLANNING This does not have to use budgets. Essential: • Set targets: to maximise long term value • Strategy: Make development continous • Growth and improvement: challenge staff • Resource management: wealth creation MBA INTENSIVE Page 116
  117. 117. Are budgets necessary? • • • • • • Co-ordination: manage cause and effect Cost management: challenge all costs Forecasting: use rolling forecasts Measurement and control: key indicators Rewards: unit rewards not individuals Delegation: give managers freedom to act MBA INTENSIVE Page 117
  118. 118. Performance Measurement MBA INTENSIVE Page 118
  119. 119. Strategic planning Five year plan, rolling forward. • Profitability • Growth of sales, profit • Market share • Customer satisfaction • Rate of innovation How to measure achievement of strategy? MBA INTENSIVE Page 119
  120. 120. Accounting-based performance measures Profit? • Could compare actual profit against budget, but companies don’t give information • An absolute measure, needs ratios for comparison. • Affected by choice of accounting policies • Measured differently in different countries MBA INTENSIVE Page 120
  121. 121. Accounting-based performance measures (contd) Profitability • A relative measure, better for comparison. • Calculate for subdivisions of an organisation. Methods • Return on capital employed • Residual income • Economic value added MBA INTENSIVE Page 121
  122. 122. Return on capital employed Profit before interest and taxes Fixed assets plus current assets less current liabilities Can be used for divisions of a company if assets and liabilities can be allocated. MBA INTENSIVE Page 122
  123. 123. Return on shareholders’ funds Net profit after interest and taxation Shareholders’ funds Can only be calculated for the company as a whole, not subdivided for divisions of organisation. MBA INTENSIVE Page 123
  124. 124. Residual income Ask: What is the income (profit) remaining after deducting a notional interest charge for the use of capital? X Z £000’s Operating profit (EBIT) 18 1,500 Capital employed 100 10,000 ROCE 18% 15% MBA INTENSIVE Page 124
  125. 125. Residual income (contd) Suppose cost of capital is 10% for both. X Z £000’s Operating profit (EBIT) 18 1,500 Less interest charge (10) (1,000) Residual income 8 500 Company Z gives higher income to shareholders MBA INTENSIVE Page 125
  126. 126. Economic Value Added (EVA) Companies should deliver value that exceeds the cost of capital. X Z Profit after tax (before interest) 13 1,050 Interest charge (net of tax) (7) (700) EVA 6 350 Z gives higher EVA than does X MBA INTENSIVE Page 126
  127. 127. Performance of a division Divisions are created by decentralisation • Gives greater responsiveness • Allows faster decisions • Motivates managers • Uses specialist experience of managers But needs a measure of performance MBA INTENSIVE Page 127
  128. 128. Performance of a division (contd) Problems of decentralisation • Focus on division, not on total organisation (Called ‘dysfunctional decision making) • More information is needed, cost involved • Duplication of activities MBA INTENSIVE Page 128
  129. 129. Performance of a division (contd) Cost centre • Manager is responsible for costs Discretionary cost centre • Manager has some choices in cost budget Revenue centre • Manager is responsible for generating planned sales MBA INTENSIVE Page 129
  130. 130. Performance of a division (contd) Profit centre • Manager is responsible for revenues and costs • Target profit is set Investment centre • Manager is responsible for resources and profit, target return to be achieved MBA INTENSIVE Page 130
  131. 131. Transfer pricing What price is charged for transfers between divisions within an organisation? • Variable cost? • Variable cost plus a profit margin? • Variable cost plus portion of fixed cost? • Variable + fixed + profit margin? • Negotiated price? Reflect market? MBA INTENSIVE Page 131
  132. 132. Financial Performance Measurement • Success / Failure often determined by accounting numbers • Growth in profit, ROCE, Sales • Reduction in costs, headcount, errors, stock • Financial Ratio Analysis MBA INTENSIVE Page 132
  133. 133. Financial Performance Measurement (contd) • • • • Achieving outcome at or under budget Adverse / Favourable variance analysis Project NPV – cost overruns OBJECTIVE APPROACH TO Performance measurement MBA INTENSIVE Page 133
  134. 134. Problem with financial measures A Simple Scenario. Division in large company enjoyed major growth in profitability over two years ..manager promoted. New manager ….drop in profits. WHY ? MBA INTENSIVE Page 134
  135. 135. Financial measures (contd) Top line answer • Division’s market share dropped • Costs were reduced by reducing maintenance of cutting machine, reducing staff training •build up of stocks (inventory) of unsold goods Bottom line answer • Reduced investment in new technology Financial System did not pick up the BAD Events MBA INTENSIVE Page 135
  136. 136. Problems with financial information • Complexity /mystery and the method of calculation • Arbitrary treatment of some cost items • Time lag between event and the financial ledger • No direct observable relationship between activities and reported costs • Irrelevant to managers MBA INTENSIVE Page 136
  137. 137. Problems with financial information (contd) • Managers need to convert data into meaningful information. • Implied assumption that control costs will control activities. • Focus on cost minimisation, not on effectiveness or valueadding. Could be valid reasons for costs increasing. • Simplification of organisational activities, by reducing everything into a single £ value. MBA INTENSIVE Page 137
  138. 138. Value of Financial Performance Measurement • Managers accept importance of financial outcome of their function (especially if linked to pay / prospects). • Managers will try to increase their profitability. • Managers often devise their own budget 'systems’. MBA INTENSIVE Page 138
  139. 139. Value of Financial Performance Measurement (contd) • Need information on relationships between activities they control and financial outcome • Ignore formal budget reports / spend time and effort proving official budget is wrong • Do not assume that managers can "translate" £s into actual activities MBA INTENSIVE Page 139
  140. 140. Information Managers Use US study concluded information used for daily operating control did not come from the budgeting system. Managers' information needs are affected by: •the resources most significant to their process, in terms of cost, quality, availability •the time frame in which this information is needed MBA INTENSIVE Page 140
  141. 141. Indicators for managers  level of finished goods  level of orders (demand)  key production limiting factors  simple counts of output per hour / shift / day,  physical quantities of materials / labour used,  down-time MBA INTENSIVE Page 141
  142. 142. Indicators for managers (contd)  scrap quantities,  rework rates.  capacity utilisation  physical production requirements (long - medium and short-term) MBA INTENSIVE Page 142
  143. 143. Non-Financial Measures Non-financial is any information not valued in £s. It has the following advantages: • Expressed in terms/language understandable to managers (non-accountants) • Requires very little "translation" by managers MBA INTENSIVE Page 143
  144. 144. Non-Financial Measures (contd) • Potentially quicker, relevant • Relates to events, activities, actual observable performance • Can be used to make sense of financial budgets • Better reflects the "reality" of the situation, not confused by strange accounting rules/conventions MBA INTENSIVE Page 144
  145. 145. Integrating Non-£ and £ measures • • • • • • Activity Based Accounting Benchmarking Performance Scoring Balanced Scorecard Strategic Management Accounting Many other – multiple criterion decision making, data envelopment analysis, etc… MBA INTENSIVE Page 145
  146. 146. Balanced Scorecard Financial Perspective Customer Perspective Vision and Strategy Internal Business Perspective Learning & Growth Perspective MBA INTENSIVE Page 146
  147. 147. Balanced Scorecard • systematic attempt to design performance measurement system that integrates – organisational objectives, – co-ordination of individual decision making – need for organisational learning. • create an environment that facilitates continual improvement MBA INTENSIVE Page 147
  148. 148. Balanced Scorecard (contd) • reflect the organisation’s understanding of the causes of successful performance. • monitoring performance and what managers believe are drivers of good performance • performance measure system should measure the most critical aspects of organisational performance. MBA INTENSIVE Page 148
  149. 149. Balanced Scorecard (contd) BS performance measures should • be clearly understood by all employees • link manufacturing performance and financial performance • be linked to ensure constancy of purpose. MBA INTENSIVE Page 149
  150. 150. Balanced Scorecard (contd) BS performance measures should • be able to identify cause-effect relations to enable employees to deal with poor performance and continue good practices. • be based on critical success factors • identify trends and rate of change MBA INTENSIVE Page 150
  151. 151. Not-for-profit organisations • Economy Cost at which resources are acquired • Efficiency Compare inputs and outputs • Effectiveness How resources are used Value for Money MBA INTENSIVE Page 151

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