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Financial Key Performance        IndicatorsModule 9 - Finance for Non-Finance
Accounting based  Performance Measurement
Objectives1. Define responsibility accounting, and               After studying this   describe four types of responsibili...
Responsibility accounting is a system that measures the results of each responsibilitycenter according to the information ...
Types of Responsibility CentersCost center: A responsibility center in which a manager is responsible only for costs.Reven...
Types of Responsibility CentersProfit center: A responsibility center in which a manager is responsible for both revenues ...
ACCOUNTING INFORMATION USED TO MEASURE                PERFORMANCE                              Capital                Cost...
Return on Investment        Operating incomeROI =      Average operating assets    Beginning net book value +      Ending ...
Comparison of ROI                            Electronics    Medical Supplies                             Divisions       D...
Comparison of ROI                            Electronics    Medical Supplies                             Divisions       D...
Margin and TurnoverROI = Margin x Turnover   Operating Income Sales        Sales           Average operating assets
MARGIN AND TURNOVER COMPARISONS              Electronics        Medical Supplies               Division             Divisi...
Advantages of ROI1. It encourages managers to  focus on the relationship  among sales, expenses,  and investments.2. It en...
Disadvantages of ROI1) It can produce a narrow   focus on divisional   profitability at the expense   of profitability for...
Economic value added (EVA) is after-     tax operating profit minus the total     annual cost of capital.EVA = After-tax o...
There are two steps involved incomputing cost of capital:   1. Determine the      weighted average cost      of capital (a...
Weighted Average Cost of Capital    Suppose that a company has two sources offinancing: $2 million of long-term bonds payi...
Weighted Average Cost of Capital       Amount       Percent x After-Tax Cost = Weighted CostBonds $2,000,000     0.25   0....
EVA Example     Suppose that Mahalo, Inc., had after-tax operating income last year of $900,000. Threesources of financing...
Weighted Average Cost of Capital                                                 Weighted            Amount     Percent x ...
EVA ExampleMahalo’s EVA is calculated as follows:   After tax operating income            $900,000   Less: Cost of capital...
Behavioral Aspects of EVAA number of companies have discovered thatEVA helps to encourage the right kind ofbehavior from t...
Behavioral Aspects of EVAIn many companies, the responsibility forinvestment decisions rests with corporatemanagement. As ...
The Balanced Scorecard translates            an organization’s mission and            strategy into operational objectives...
Strategy, according to Robert Kaplan andDavid Norton, is defined as   “. . . choosing the market and customer segments the...
Vision and StrategyFinancial   Customer          Process      L and G                       Objectives                    ...
Financial   Increase Sales       Increase Profits              Increase             IncreaseCustomer       Market         ...
Summary of Objectives and Measures:      Financial Perspective      Objectives                     Measures Revenue Growth...
Objectives                         MeasuresCost Reduction:Reduce unit product cost           Unit product costReduce unit ...
Summary of Objectives and Measures:      Customer Perspective     Objectives                        MeasuresCore:Increase ...
Objectives                     MeasuresPerformance Value:Decrease price                  PriceDecrease postpurchase costs ...
Actual Conversion Cost per UnitStandard costs per minute = $1,600,000/400,000                          = $4 per minuteActu...
Summary of Objectives and Measures:       Process Perspective     Objectives                      MeasuresInnovation:Incre...
Objectives                     MeasuresOperations:Increase product quality      Quality costs                             ...
Summary of Objectives and Measures:  Learning and Growth Perspective     Objectives                       MeasuresIncrease...
Objectives                     MeasuresIncrease motivation and        Suggestions per employee  alignment                 ...
Examples of Key Performance IndicatorsExamples of Key Performance Indicators   Key Results Areas     Key Performance Indic...
Examples of Key Performance Indicators (2)Examples of Key Performance Indicators              (continued)     Key Results ...
Examples of Key Performance Indicators (3)Examples of Key Performance Indicators              (continued)   Key Results Ar...
Examples of Key Performance Indicators (4)          Examples of Key Performance             Indicators (continued)  Key Re...
Examples of Key Performance Indicators (5)Examples of Key Performance Indicators              (continued)  Key Results Are...
How to Set Targets¢ Past performance trends per historical data.¢ Performance levels of similar organizational units at a ...
Checklist for Setting Targets¢ Targets match up with measurements, one to one.¢ Targets require improving current levels o...
Initiatives should enable strategic execution        Initiatives                   Goals or ObjectivesValue Mapping Projec...
Going from Output to OutcomeWhen you first launch your Initiative, you probably want to use an Output Measurement. Once th...
What is KPI in graphic?Input                          KPI                               KPI2AfterBefore              Befor...
Sale per ringgit AdvertisingAdvertising                    Sales/advertising                               KPI2  After  Be...
Thank youQuestion please                  48
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9 accouting based kpi

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using accounts as a basis for your performance measures.

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9 accouting based kpi

  1. 1. Financial Key Performance IndicatorsModule 9 - Finance for Non-Finance
  2. 2. Accounting based Performance Measurement
  3. 3. Objectives1. Define responsibility accounting, and After studying this describe four types of responsibility centers. chapter, you should2. Tell why firms choose to decentralize. be able to:3. Compute and explain return on investment (ROI) and economic value added (EVA).4. Explain the role of balance scorecard in a evaluating firm performance.
  4. 4. Responsibility accounting is a system that measures the results of each responsibilitycenter according to the information managers need to operate their centers. 4
  5. 5. Types of Responsibility CentersCost center: A responsibility center in which a manager is responsible only for costs.Revenue center: A responsibility center in which a manager is responsible only for sales. Continued
  6. 6. Types of Responsibility CentersProfit center: A responsibility center in which a manager is responsible for both revenues and costs.Investment center: A responsibility center in which a manager is responsible for revenues, costs, and investments.
  7. 7. ACCOUNTING INFORMATION USED TO MEASURE PERFORMANCE Capital Cost Sales Investment OtherCost center xRevenue center Direct cost x onlyProfit center x xInvestment center x x x x
  8. 8. Return on Investment Operating incomeROI = Average operating assets Beginning net book value + Ending net book value 2
  9. 9. Comparison of ROI Electronics Medical Supplies Divisions Divisions2003: Sales $30,000,000 $117,00,000 Operating income 1,800,000 3,510,000 Average operating assets 10,000,000 19,500,000 ROI 18 % 18 % $1,800,000 $10,000,000
  10. 10. Comparison of ROI Electronics Medical Supplies Divisions Divisions2004: Sales $40,000,000 $117,00,000 Operating income 2,000,000 2,925,000 Average operating assets 10,000,000 19,500,000 ROI 20 % 15 % $2,000,000 $10,000,000
  11. 11. Margin and TurnoverROI = Margin x Turnover Operating Income Sales Sales Average operating assets
  12. 12. MARGIN AND TURNOVER COMPARISONS Electronics Medical Supplies Division Division 2003 2004 2003 2004Margin 6.0% 5.0% 3.0% 2.5%Turnover x 3.0 x 4.0 x 6.0 x 6.0ROI 18.0% 20.0% 18.0% 15.0%
  13. 13. Advantages of ROI1. It encourages managers to focus on the relationship among sales, expenses, and investments.2. It encourages managers to focus on cost efficiency.3. It encourages managers to focus on operating asset efficiency.
  14. 14. Disadvantages of ROI1) It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.2) It encourages managers to focus on the short run at the expense of the long run.
  15. 15. Economic value added (EVA) is after- tax operating profit minus the total annual cost of capital.EVA = After-tax operating income – (Weighted average cost of capital x Total capital employed) 15
  16. 16. There are two steps involved incomputing cost of capital: 1. Determine the weighted average cost of capital (a percentage figure) 2. Determine the total dollar amount of capital employed 16
  17. 17. Weighted Average Cost of Capital Suppose that a company has two sources offinancing: $2 million of long-term bonds paying 9 percent interest and $6 million of commonstock, which is considered to be of average risk. If the company’s tax rate is 40 percent and the rate of interest on long-term government bonds is 6 percent, the company’s weighted average cost of capital is computed as follows:
  18. 18. Weighted Average Cost of Capital Amount Percent x After-Tax Cost = Weighted CostBonds $2,000,000 0.25 0.009(1 –0.4) = .054 0.0135Equity 6,000,000 0.75 0.06 + 0.06 = .120 0.0900 Total $8,000,000 0.1035 Thus, the company’s weighted average is 10.35 percent.
  19. 19. EVA Example Suppose that Mahalo, Inc., had after-tax operating income last year of $900,000. Threesources of financing were used by the company: $2 million of mortgage bonds paying 8 percent interest, $3 million of unsecured bonds paying10 percent interest, and $10 million in common stock, which was considered to be no more or less risky than other stocks. Mahalo, Inc. pays a marginal tax rate of 40 percent. 19
  20. 20. Weighted Average Cost of Capital Weighted Amount Percent x After-Tax Cost = CostMortgage bonds $ 2,000,000 0.133 0.048 0.006Unsecured bonds 3,000,000 0.200 0.060 0.012Common stock 10,000,000 0.667 0.120 0.080 Total $15,000,000Weighted average cost of capital 0.098
  21. 21. EVA ExampleMahalo’s EVA is calculated as follows: After tax operating income $900,000 Less: Cost of capital 784,000 EVA $116,000 21
  22. 22. Behavioral Aspects of EVAA number of companies have discovered thatEVA helps to encourage the right kind ofbehavior from their divisions in a way thatemphasis on operating income alone cannot.The underlying reason is EVA’s reliance on thetrue cost of capital.
  23. 23. Behavioral Aspects of EVAIn many companies, the responsibility forinvestment decisions rests with corporatemanagement. As a result, the cost of capital isconsidered a corporate expense. If a divisionbuilds inventories and investment, the cost offinancing that investment is passed along to theoverall income statement and does not show upas a reduction from the division’s operatingincome. 23
  24. 24. The Balanced Scorecard translates an organization’s mission and strategy into operational objectives and performance measures for four different perspectives:  The financial perspective  The customer perspective TheBalanced  The internal businessScorecard process perspective  The learning and growth perspective
  25. 25. Strategy, according to Robert Kaplan andDavid Norton, is defined as “. . . choosing the market and customer segments the business unit intends to serve,identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.”
  26. 26. Vision and StrategyFinancial Customer Process L and G Objectives Strategy- Measures Translation Process Targets Initiatives
  27. 27. Financial Increase Sales Increase Profits Increase IncreaseCustomer Market Customer Share Satisfaction Reduce Process Redesign Defective Products Units Infra- Quality Testable Strategystructure Training Illustrated
  28. 28. Summary of Objectives and Measures: Financial Perspective Objectives Measures Revenue Growth: Increase the number of new Percentage of revenue products from new products Create new applications Percentage of repeat customers Develop new customers and Percentage of revenue from markets new sources Adopt a new pricing strategy Product and customer profitability
  29. 29. Objectives MeasuresCost Reduction:Reduce unit product cost Unit product costReduce unit customer cost Unit customer costReduce distribution channel cost Cost per distribution channelAsset Utilization:Improve asset utilization Return on investment Economic value added
  30. 30. Summary of Objectives and Measures: Customer Perspective Objectives MeasuresCore:Increase market share Market share (percentage of market)Increase customer retention Percentage of repeat customersIncrease customer acquisition Number of new customersIncrease customer satisfaction Ratings from customer surveysIncrease customer profitability Customer profitability
  31. 31. Objectives MeasuresPerformance Value:Decrease price PriceDecrease postpurchase costs Postpurchase costsImprove product functionality Ratings from customer surveysImprove product quality Percentage of returnsIncrease delivery reliability On-time delivery percentage Aging scheduleImprove product image and Ratings from customer reputation surveys
  32. 32. Actual Conversion Cost per UnitStandard costs per minute = $1,600,000/400,000 = $4 per minuteActual cycle time = 60 minutes/10 units = 6 minutes per unitActual conversion costs = $4 x 6 = $24 per unit Theoretical Conversion Cost per UnitTheoretical cycle time = 60 minutes/12 units = 5 minutes per unitTheoretical conversion costs = $4 x 5 = $20 per unit
  33. 33. Summary of Objectives and Measures: Process Perspective Objectives MeasuresInnovation:Increase the number of new Number of new products vs. products plannedIncrease proprietary products Percentage of revenue from proprietary productsDecrease new product Time to market (from start development time to finish)
  34. 34. Objectives MeasuresOperations:Increase product quality Quality costs Output yields Percentage of defective unitsIncrease process efficiency Unit cost trends Output/input(s)Decrease process time Cycle time and velocity MCEPostsales Service:Increase service quality First-pass yieldsIncrease service efficiency Cost trends Output/input(s)Decrease service time Cycle time
  35. 35. Summary of Objectives and Measures: Learning and Growth Perspective Objectives MeasuresIncrease employee capabilities Employee satisfaction ratings Employee turnover percentage Employee productivity (revenue/employee) Hours of training Strategic job coverage ratio (percentage of critical job requirements filled)
  36. 36. Objectives MeasuresIncrease motivation and Suggestions per employee alignment Suggestions implemented per employeeIncrease information systems Percentage of processes with capabilities real-time feedback capabilities Percentage of customer-facing employees with on-line access to customer and product information
  37. 37. Examples of Key Performance IndicatorsExamples of Key Performance Indicators Key Results Areas Key Performance Indicators Return/profit Return on investment Percentage of return on sales Net profit before taxes (dollars) Percentage of gross margin (by product line) Productivity Dollars of sales per employee Units per month (by product line) Output per work-hour Output per employee Overtime as percentage of payrool Downtime Turnaround time 37
  38. 38. Examples of Key Performance Indicators (2)Examples of Key Performance Indicators (continued) Key Results Areas Key Performance IndicatorsEmployee development Training investment as percentage of sales Number of employees on degree plan Cross-training plan Number of backups per position Number of employees with implemented development plan 38
  39. 39. Examples of Key Performance Indicators (3)Examples of Key Performance Indicators (continued) Key Results Areas Key Performance IndicatorsQuality assurance Percentage of first-time acceptance Yield Cost of rework, scrap Percentage of error-free completions (per shift, per employee) Percentage of recidivism (in law enforcement) Cross-functional Percentage of on-time completions Integration Number of unresolved conflicts Average lead time on support requests 39
  40. 40. Examples of Key Performance Indicators (4) Examples of Key Performance Indicators (continued) Key Results Areas Key Performance Indicators Research and Number of new product ideas approved for development development Projected dollar value of approved product ideas Number of new applications forcurrent products/services Cost of R&D investment: ratio to total budget 40
  41. 41. Examples of Key Performance Indicators (5)Examples of Key Performance Indicators (continued) Key Results Areas Key Performance Indicators Organizational Favorable mentions in media Image Public information programs Involvement in community Interorganizational cooperative efforts Legislative relations Response time to legislators Inquiries handled favorably Funding approved Major programs approved 41
  42. 42. How to Set Targets¢ Past performance trends per historical data.¢ Performance levels of similar organizational units at a comparable level that facilitates benchmarking.¢ Best practices across the agency, the public sector or the private sector. Must be at a pre-existing high level of performance before you use this approach.¢ For newly launched services, may have to establish a baseline per a prototype test and extend out from this point forward.¢ For major strategic shifts, may have to set directly per the plan itself without regard for hard data. 42
  43. 43. Checklist for Setting Targets¢ Targets match up with measurements, one to one.¢ Targets require improving current levels of performance.¢ Targets are a stretch, but achievable: they may require improvements to existing processes.¢ Targets are quantifiable so that the target communicates if the expected performance was met.¢ Long-term targets are established before short-term targets.¢ Financial/Budget related targets are established before non-financial targets. 43
  44. 44. Initiatives should enable strategic execution Initiatives Goals or ObjectivesValue Mapping Project Improve identification and delivery of all agency services across the full stakeholder spectrumEmployee Rotation Program Improve the employee turnover and satisfaction scoresWeb Self Service Portal Reduce agency costs and streamline our services for more direct service deliveryCommon Knowledge Center Expand the overall knowledge base so that inter-functions can learn from one anotherCustomer Survey and Develop a more systematic process acrossAnalysis Tool Program the entire agency to better connect to our customersShared Service Center Reduce reworks and overlaps between ourTracking System seven shared service centers 44
  45. 45. Going from Output to OutcomeWhen you first launch your Initiative, you probably want to use an Output Measurement. Once the Initiative is up and running, change your measurement to an Outcome to see if the Initiative is really having strategic impact. Initiative Output Outcome Measurement MeasurementLean Process / Six Number of Projects Overall reductions in errors,Sigma Defined by Region reworks, and cycle timesActivity Based Costing % of Service Center Reductions in identified re-/ Management Outlets with ABC Models activities per process study(ABC/M) in place for Allocation CostsEmployee % of Employees who Higher skill levels ofCompetency Models have a Competency employees using the models Model in place 45
  46. 46. What is KPI in graphic?Input KPI KPI2AfterBefore Before After Output 46 46
  47. 47. Sale per ringgit AdvertisingAdvertising Sales/advertising KPI2 After Before Before After Sales 47 47
  48. 48. Thank youQuestion please 48
  • LalBahadurLama

    Jun. 28, 2016
  • roniback

    Jan. 17, 2016
  • MohammedMokhtar9

    Dec. 15, 2015
  • RegimantasBuozius

    Jun. 18, 2015
  • thaituan2808

    Jul. 28, 2014

using accounts as a basis for your performance measures.

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