Analyse the performane of business

1. Chapter 4
Performance Analysis
This chapter covers the following:
1. Quantitative analysis
2. Financial Analysis
3. Benchmarking
4. Baldrige model

2. • Quantitative analysis
– choose three or four key ratios
– there is no need to illustrate the formula or the
calculation only one comparator should be
needed
– focus on the cause of any changes and what this
might tell us about the organisation's position

3. • Profitability ratios
– ROCE
– Gross Margin
– Net margin
– ROE
• Efficiency ratios
– Assets turnover
– Receivables days
– Inventory days
– Payable days
– Sales or revenue per person/emloyee

4. • Liquidity ratios
– Current ratio
– Quick ratio
• Gearing ratio
– Financial gearing
• Investor ratios
– Dividend cover
– Interest cover
– EPS
– PE ratio

5. Ratio Calculation
Profitability ratios
ROCE
Gross margin
Net margin
ROE
Op profit/cap employed x100
GP/Net sales x 100
NP/Net sales x 100
PAT-Pre. Div / Shareholders funds x 100
Efficiency ratio
Asset turnover
ROCE
Receivables days
Payable days
Inventory days
Sales / Capital employed
Net margin x asset turnover
Cl receivables / Cr sales x 365
Cl Payables / Cr purchaes x 365
Cl inventory / Cost of sales x 365
Liquidity ratios
Current ratio
Quick ratio
CA/CL
Quick assets/ CL
Gearing ratios
Financial gearing Debt/ Equity or Deb/ Debt+ Equity
Investor ratios
Dividend cover
Interest cover
EPS
PE ratio
PAT/ Total dividend
PBIT/Interest
PAT – Pre. Dividend / No. Of shares
Share price / EPS

6. • Inter-firm comparisons
– While making inter firm comparison keep
limitations of ratios
• Non-financial performance measures
– performance analysis should not focus on profit
alone
– A range of performance indicators should be used
and these should be a mix of financial and non-
financial measures.

7. CSFs KPIs
Competitiveness sales growth by product or service measures of customer
base relative market share and position
Resource utilisation efficiency measurements of resources planned against
consume measurements of resources available against those
used
Quality of service productivity measurements quality measures in every unit
evaluate suppliers on the basis of quality number of
customer complaints received
Customer satisfaction number of new accounts lost or gained speed of response to
customer needs informal listening by calling a certain
number of customers each week
Quality of working life number of factory and non-factory manager visits to
customers days absence labour turnover overtime measures
of job satisfaction
Innovation proportion of new products and services to old one
new product or service sales levels
Quality of output returns from customers reject rates reworking costs warranty
costs

8. • Problems with non-financial performance
indicators
– wide range of performance indicators can be time-
consuming and costly
– complex system that managers may find difficult to
understand
– no clear set of NFPIs that the organisation must use
– scope for comparison with other organisations is
limited
• Using Key Performance Indicators (KPIs) in
scenarios
– KPIs may be presented in the scenario along with
financial indicators

9. 2. Benchmarking
• Why benchmark?
– Benchmarking is the process of systematic comparison
of a service, practice or process.
– Its use is to provide a target for action in order to
improve competitive position.
• The strategic role of benchmarking
– In strategic analysis it can be used in value chain
analysis to compare one company's values to another
– In making strategic choices
– In putting strategy into action
– There will be links between benchmarking, critical
success factors (CSFs) and key performance indicators
(KPIs).

10. • Types of benchmarking
– Internal benchmarking
– Competitive benchmarking
– Generic benchmarking
• Benefits and dangers of benchmarking
– The main benefits include:
• improved understanding of environmental pressures
• improved competitive position
• a creative process of change
• a target to motivate and improve operations
• increased rate of organisational learning
– Dangers of benchmarking
• not always reveal the reasons for good/poor performance
• benchmarking exercise can appear to threaten staff

11. 3. Multi variable performance analysis
– Organisations should combine financial and non-
financial performance measures in order to
provide a broader view of the organisation’s
performance and position. There are different
tools one such tool is
• The balanced scorecard
– This suggests that appraise performance from four
perspectives
• a financial perspective
• a customer perspective
• an innovation perspective
• an internal business process perspective

12. • Baldrige performance excellence
– This was developed by Malcom Baldrige as a way of
measuring and rewarding those organisations that
have performed better than their contemporaries
– The Baldrige model assesses across seven categories
• Leadership
• Strategy
• Customers
• Workforce
• Operations
• Results
• Measurement, analysis, and knowledge management

13. • https://docs.google.com/forms/d/e/1FAIpQLS
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