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Chapter 4 Performance analysis.pptx
- 1. Chapter 4 Performance Analysis Thischapter 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 Grossmargin 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 salesgrowth 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 withnon-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 • Whybenchmark? – 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 ofbenchmarking – 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 variableperformance 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 performanceexcellence – 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
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