Accounting Management: Performance Measurement Techniques

1. Reporters:
Michael Onia

2. Performance
Measurement
Techniques
Financial Non-Financial Balance Scorecard Benchmarking

3. I. What is Performance
Measurement?
• It is the monitoring of budgets or targets
against the actual results to establish how well
the business and its employees are functioning
as a whole and as individuals.
• It can relate to short-term objectives (e.g. cost
control) or long-term measures (e.g. customer
satisfaction).
• Objectives and goals of a business will vary
depending on the type of business that is
being operated

4. A. The Mission Statement and the Corporate Plan
• Purpose – is the business meeting it’s main aims? Maximization of shareholder wealth?
Maintaining customer satisfaction? Producing innovative products/services?
• Strategy – is the business providing the products and services it planned to? Is the
product or service being provided in the manner it intended?
• Policies and Culture – are the staff behaving in the manner expected of them? Is the
customer service at an appropriate level?
• Values – are the core principles of the business being maintained and not
compromised? Is staff morale being maintained at a suitable level? What is the
level of staff turnover?

5. B. Different Planning Levels

6. II. External Factors Affecting Performance Measurement
1. Economic and Market Condition
Any performance measure that is used by a business will need to be flexible to allow for peaks and troughs in
economic and market conditions that are beyond the control of the business or the specific employee or manager.
The actions of competitors must also be considered. For example, demand may decrease if a competitor reduces its
prices or launches a successful advertising campaign.
2. Government Regulation
The government can give a direct effect on the workings of a private sector organization by introducing regulations
or by having departments that monitor business activity such as:
- The Competition Act which prohibits anticompetitive agreements and any abuse of a dominant market position.
ex. The Philippine Competition Act (PCA) or R.A. 1066.
- The FAIR TRADE ENFORCEMENT BUREAU serves as the DTI’s regulatory and implementing arm in enforcing
compliance with the different Trade and Industry Laws, more particularly the Consumer Act of the Philippines (RA
No. 7394), the Price Act (RA No. 7581 as amended by RA No. 10623), and the Law on Products Standards (RA No.
4109).

7. Comparing strategy in Private and
Public-Sector Organizations
Strategic Feature Private School State School
General strategic goal Competitiveness Achievement of mission
General financial goals Profit; growth; market share Cost reduction; efficiency
Values Innovation; creativity; good will; recognition Accountability to public; integrity; fairness
Desired outcome Customer Satisfaction Customer Satisfaction
Stakeholders Fee payers Taxpayers; inspectors; legislators
Budget defined by Customer demand Leadership; legislators; planners
Key Success Factors Growth rate; earnings; market share; uniqueness;
advance technology
Best management practices; standardization;
economies of scale; standardized technology

8. III. Critical Success Factors
Critical success factors (CSFs) are the essential areas of the business that must be performed well if the mission,
objectives and goals of the business are to be achieved.
CSFs act as a common point of reference to measure the success of the business. It help everyone in the team to
know exactly what they need to do to ensure the success of the business. This helps employees perform their own
work in the right context and so pull together towards the same overall aims to achieve goal congruence.
CSFs are related to the mission and goals of the business:
• The mission focuses on the overall long term aims and what is ultimately to be achieved.
• Objectives break down the mission into quantifiable goals.
• CSFs are the essential areas that must be perfected to achieve the objectives and therefore the mission of the
business.
Measurement of CSFs is possible by the creation of key performance indicators (KPIs). KPIs can be based on financial
and non-financial information.

9. CSFs KPIs
Competitiveness Sales growth by product or service
Measures of customer base
Relative market share and position
Resource utilization Efficiency measurements of resources planned against consume
Measurements of resources available against those used
Productivity measurements
Quality of service Quality measures in every unit
Evaluate suppliers on the basis of quality
Number of customer complaints received
Number of new accounts lost or gained
Examples of CSFs and KPIs

10. CSFs KPIs
Customer satisfaction Speed of response to customer needs
Informal listening by calling a certain number of customers each week
Number of customer visits to the factory or workplace
Number of factory and non-factory manager visits to customers
Quality of working life Days absent
Labour turnover
Overtime
Measures of job satisfaction
Innovation Proportion of new products and services to old one
New product or service sales level
Responsiveness (lead time) Order entry delays and errors
Wrong blueprints or specifications
Long set-up times
High defect count
Machines that break down
Examples of CSFs and KPIs

11. CSFs KPIs
Quality output Returns from customers
Reject rates
Reworking costs
Warranty costs
Flexibility (ability to react to
changing demand and a
changing environment)
Product/service introduction flexibility
Product/service mix flexibility
Volume flexibility
Delivery flexibility
Time to respond customer demands
Examples of CSFs and KPIs

12. IV. Financial Performance Measures
 It is used to monitor the inflows (revenue) and outflows
(costs) and the overall management of money in the
business.
 It can be used to record the performance of cost
centers, profit centers and investment centers within a
responsibility accounting system but they can also be
used to assess the overall performance of the
organization.
 Cost based performance measures can be calculated as
a simple cost per unit of output. The organization will
have to determine its policy for establishing cost per
unit for performance measurement purposes.

13. V. Measuring Profitability
The primary objective of a profit seeking company is to maximize profitability. A business needs to make a profit to be
able to provide a return to any investors and to be able to grow the business by re-investment.
3 profitability ratios are often used to monitor the achievement of this objective:
• Return on capital employed (ROCE) = operating profit ÷ (non-current liabilities + total equity)%
• Return on sales (ROS) = operating profit ÷ revenue %
• Gross margin = gross profit ÷ revenue %
NOTE: Operating profit is profit before interest and tax and after non-production overheads have been charged.

14. • This key measure of profitability as an investor will want to know the likely return from any investment made.
• ROCE is the operating profit as a percentage of capital employed. It provides a measure of how much profit is
generated from each $1 of capital employed in the business.
• Operating profit (profit before interest) is being compared to long term debt and dividends to shareholders, so the
figures used are comparing like for like.
V. Measuring Profitability: Return on Capital Employed (ROCE)
A high ROCE is desirable. An increase in ROCE could achieve by:
 Increasing profit, e.g. through an increase in sales price or through better control of costs.
 Reducing capital employed, e.g. through the repayment of long-term debt.

15. • This is the operating profit as a percentage of revenue.
• A high return is desirable. It indicates that either sales prices and/or volumes are high or that costs are being kept
well under control.
• ROCE, ROS and the Asset Turnover, ratios can be use together:
V. Measuring Profitability: Return on Sales (Operating Margin)
𝑹𝑶𝑪𝑬
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
=
𝑹𝑶𝑺
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑥
𝑨𝒔𝒔𝒆𝒕 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

16. V. Measuring Profitability: ROCE, ROS and Asset Turnover
Example : Company X and Y are both involved in retailing. The relevant information for the year ended
September 30, 2023, is presented below.
Company X
ROCE = 10,000 ÷ 50,000 × 100 = 20%
ROS = 10,000 ÷ 80,000 × 100 = 12.5%
Asset turnover = 80,000 ÷ 50,000 = 1.6
ROCE = ROS × Asset Turnover = 0.125 × 1.6 = 0.2 = 20%
X Y
$000 $000
Revenue 80,000 200,000
Operating Profit 10,000 10,000
Capital employed 50,000 50,000
Company Y
ROCE = 10,000 ÷ 50,000 × 100 = 20%
ROS = 10,000 ÷ 200,000 × 100 = 5%
Asset turnover = 200,000 ÷ 50,000 = 4
ROCE = ROS × Asset Turnover = 0.2 × 4 = 0.05 = 5%

17. V. Measuring Profitability: Gross Margin
• A higher gross margin means a company has more money left over after selling its goods or services to
pay for operating costs and expenses, marketing, and research and development expenses. This can
result in higher profits and better financial health for the business.
Example: If a company with $100,000 in revenue has a gross margin of 50%, it means they have
$50,000 left over after accounting for the COGS.
• Gross margin measures a company's gross profit compared to its revenues as a percentage.
• Several challenges can impact a company's ability to sustain high gross margins: volatile commodity prices,
increased competition, labor cost etc.

18. VI. Measuring Liquidity
• A business can be profitable but at the same time encounter cash flow problems. Cash at the bank and
profit are not the same thing.
• There are two liquidity ratios that are used to give an indication of a company’s ability to manage and
meet short term financial obligations.
Current Ratio
- The ratio measures the company’s ability to meet its
short-term liabilities due within one year with the
current assets than should be converted into cash within
one year.
Current Ratio=
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
* A ratio more than 1 is desirable.
Acid Test (Quick Ratio)
- This is a similar to the current ratio, but inventory is
removed from the current assets due to its poor
liquidity (time taken to convert into cash) in the short-
term.
Quick Ratio=
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 −𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

19. VII. Measuring Activity
Activity ratios look at how well a business manages to convert statement of financial position items into
cash. They are used to investigate how efficiently current assets are managed.
 Assets Turnover = Revenue ÷ Capital Employed
- It measures how much revenue is generated from each $1 of capital employed in business.
Example of the Asset Turnover Ratio:
An entity has sales of $1,000,000, beginning total assets of $200,000 and ending total assets of
$300,000.
Its asset turnover ratio is:
$1,000,000 Revenue ÷ (($200,000 Beginning assets + $300,000 Ending assets) ÷ 2)
= 4:1 Asset turnover ratio
In the example, the business is generating $4 of sales for every $1 of assets.

20. VII. Measuring Activity
 Inventory Days = inventory ÷ costs of sales × 365
- This represents the average number of days that inventory goods are held before being sold.
 Receivable Days = receivables ÷ credit sales × 365
- This is the average period it takes for a company’s receivables to pay what they owe.
 Payable Days = payables ÷ credit purchases × 365
- This is the average period it takes for a company to pay suppliers for purchases.

21. VIII. Measuring Risk
 Capital Gearing (leverage)
- This ratio calculates the relationship between borrowed capital (debt) and owner’s capital (equity).
- Example: In order to fund a new project, ABC Inc. finds that
it is unable to sell new shares to equity investors at a
reasonable price. Instead, ABC looks to the debt market and
secures a USD $15,000,000 loan with one year to maturity. At
present, ABC Inc. has $2,000,000 of equity value.
*** The gearing ratio would thus be 7.5x—[$15 million in total
debt + equity, divided by $2 million in shareholders' equity]. ABC
would certainly be considered a highly geared firm.
Capital Gearing = non-current liabilities (debt) ÷ ordinary shareholders funds (equity) %

22. VIII. Measuring Risk
 Interest Cover (income gearing)
This represents how many times the finance cost( interest payments) could be paid out of the operating profit.
Interest coverage ratio = Earnings before interest and taxes ÷ Interest expense
Example: ABC Company earnings $5,000,000 before
interest and taxes in its most recent reporting month. Its
interest expense for that month is $2,500,000. Therefore,
the company's interest coverage ratio is calculated as:
$5,000,000 EBIT ÷ $2,500,000 Interest expense
= 2:1 Interest coverage ratio
The ratio indicates that ABC's earnings should be sufficient
to enable it to pay the interest expense.

23. IX. Problems with using only Financial Performance Indicators
Short-Term vs Long-Term Performance
 Linking rewards to financial performance may tempt managers to make decisions that will improve
short-term financial performance but may have a negative impact on log-term profitability. E.g. they
may decide to cut investment or to purchase cheaper but poorer quality materials.
 As mentioned at the start of this chapter any targets that are set at the different planning levels should
all aim towards achieving the overall aim or mission of the business. There should be goal congruence
to reduce the risk of a short termist view being taken by the managers.
• All of the ratios reviewed so far have concentrated on the financial performance of the business. Many of these
ratios, e.g. ROCE, gross margin, may be used to assess the performance of a division and of the manager in charge
of that division.
• Achievement of these ratios (financial performance indicators) may be linked to a reward system in order to motivate
managers to improve financial performance.
• However, there are a number of problems associated with the use of financial performance indicators to monitor
performance:

24. Sample illustration - Short Termism
 Cut backs on research and development can be particularly damaging in the developing new products and
taking advantage of new technology.
In order to achieve cost savings and to boost annual profit there are a limited number of things that a manager can
do easily. One of these is to cut back on discretionary costs such as:
• Advertising and marketing
• Training
• Maintenance
• Research and development
 All these cuts may produce a short-term profit improvement; the problem comes with long-term
profitability.
 Cut advertising and future sales may all, cut training and staff may leave or become less efficient, cut
maintenance and plat and machinery will become less productive.

25. IX. Problems with using only Financial Performance Indicators
Manipulation of Results
•Accelerating revenue – the revenue in one year may be wrongly included in the previous year in order to improve
financial performance for the earlier year
•Delaying costs- costs incurred in one year may be wrongly recorded in the next year’s accounts in order to
improve performance and meet targets for the earlier year
•Understating a provision or accrual – this would improve the financial performance and may result in the targets
and may result in the targets being achieved
•Manipulation of accounting policies- for example, closing inventory values may be overstated resulting in an
increase in profits for the year
Note: The use of only financial performance indicators has limited benefit to the company as it does not convey the full picture
regarding the factors that will drive long term profitability e.g. customer satisfaction and quality.

26. X. Non-Financial Performance Indicators (NFPIs)
• Measurements of customer satisfaction e.g. returning customers, reduction in complaints
• Resource utilization e.g. are the machines being operated for all the available hours and producing output as
efficiently as possible?
• Measurement of quality e.g. reduction in conformance and non-conformance costs
There are several areas that are particularly important for ensuring the success of a business and where the
use of NFPIs plays a key role. These include:
The large variety in types of businesses means that there are many NFPIs. Each business will have its own set of
NFPIs that provide relevant measures of the success of the business. However, NFPIs can be grouped together into 2
broad groups:
• Productivity
• Quality

27. XI. Productivity
Examples of resource utilization:
• Hotel – the cost of the bed linen used in each room compared to the number of times
the linen can be used before it needs to be disposed or, time taken to clean and set fair
a room.
• Car sales team – Sales per employee, Sales per square meter of available floor space,
average length of time a second hand car (e.g. taken as part exchange) remains unsold.
To measure the efficiency of an operation, it is also referred to as resource utilization. It relates the goods or
services produced to the resources used, and therefore ultimately the cost incurred to produce the output. The
most productive or efficient operation is one that produces the maximum output for any given set of resource
inputs or alternatively uses the minimum inputs for any given quantity or quality of output.

28. XI. Productivity: Types of Productivity Measures
1. Production-Volume Ratio - It asessess the overall production relative to the pla n or budget.
Production/volume ratio=
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑑 𝑖𝑛 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠
𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ℎ𝑜𝑢𝑟𝑠
× 100
Example:
Suppose that the budgeted output for a period is 2,000 units and the budgeted time for the production
of these units is 200 hours.
The actual output in the period is 2,300 units and the actual time worked by the labor force is 180
hours.
Standard hours per unit=
200 ℎ𝑜𝑢𝑟𝑠
2,000
= 0.1 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑢𝑡𝑝𝑢𝑡
Actual output measured in standard hours = 2,300 units × 0.1 ℎ𝑜𝑢𝑟𝑠 = 230 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠
Production volume ratio =
230
200
× 100 = 115%

29. XI. Productivity: Types of Productivity Measures
2. Capacity Ratio
- It provides information in terms of the hours of working time that have been possible in a period.
Capacity ratio=
𝑨𝒄𝒕𝒖𝒂𝒍 𝒑𝒓𝒊𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒉𝒐𝒖𝒓𝒔 𝒘𝒐𝒓𝒌𝒆𝒅
𝒃𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒉𝒐𝒖𝒓𝒔
× 𝟏𝟎𝟎
Example:
Suppose that the budgeted output for a period is 2,000 units and the budgeted time for the production
of these units is 200 hours. The actual output in the period is 2,300 units and the actual time worked by the
labor force is 180 hours.
Capacity ratio=
𝟏𝟖𝟎
𝟐𝟎𝟎
× 𝟏𝟎𝟎 = 90%
Therefore, this organization had only 90% of the production hours anticipated for the production.

30. XI. Productivity: Types of Productivity Measures
3. Efficiency Ratio - It is useful indicator of productivity based on output compared with inputs.
Efficiency ratio=
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑑 𝑖𝑛 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠
𝐴𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
× 100
Example:
Suppose that the budgeted output for a period is 2,000 units and the budgeted time for the production of these units is 200
hours. The actual output in the period is 2,300 units and the actual time worked by the labor force is 180 hours.
Efficiency ratio=
230
180
× 100 = 𝟏𝟐𝟕. 𝟕𝟖%
The workers were expected to produce 10 units per hour, the standard hour.
Therefore, in the 180 hours worked it would be expected that 1,800 units would be produced. This is 27.78 % more than
anticipated.
NB: production/volume = capacity ratio × efficiency ratio

31. XII. Quality
Examples of NFPIs that could be used to monitor quality both from an internal and external (customer) perspective
include:
Wastage levels
Internal re-working of finished products
Customer complaints
Speed of delivery
Accuracy of delivery
Number of returns
Repeat sales
New customers
Growth in sales
Labor turnover
Staff absences
Evaluation of development plans
Job satisfaction
Overtime working
Product improvements
Sales from new products
Cost of research and development
Cleanliness
Tidiness
Meeting staff needs
Meeting government targets on emissions
Quality is an issue whether manufacturing products or providing a service. Poor quality products or services will
lead to a loss of business and damage to the businesses reputation. Targets of an appropriate level need to be
set.

32. XIV. The Balanced Scorecard—Measures that Drive Performance
What is a balanced scorecard?
• It refers to a strategic management performance
metric used to identify and improve various
internal business functions and their resulting
external outcomes.
• The concept of BSCs was first introduced in 1992
by David Norton and Robert Kaplan, who took
previous metric performance measures and
adapted them to include nonfinancial
information.
• The balanced scorecard involves measuring
four main aspects of a business: Learning and
growth, business processes, customers, and
finance.

33. Customer
Mission
Vision
Strategy
Internal Business
Processes
Learning and Growth
Financial
BALANCE SCORECARD STRATEGIC
PERSPECTIVES
How do our
customers see us?
Do we get the best
deal for the
organization?
What must we excel
at?
Do we continue to
improve and create
value?
XIV. The Balance Scorecard- Measures that Drive Performance

34. XIV. The Balance Scorecard
Example: Faster Pasta is an Italian fast-food restaurant that specializes in high quality, moderately priced uthentic
Italian pasta dishes and pizzas. The restaurant has recently decided to implement abalance scorecard approach and
has established the following relevant goals for each perspective:
Perspective Goal
Customer Perspective * To increase the number of new and returning customers
* To reduce the % of customer complaints
Internal * To reduce the time taken between taking a customer’s order and delivering the
meal to the customer.
* To reduce staff turnover
Innovation and Learning * To increase the proportion of revenue from new dishes
* To increase the % staff time spent on training
Financial * To increase spend per customer
*To increase gross profit marging

35. XIV. The Balance Scorecard
Example: Faster Pasta is an Italian fast-food restaurant that specializes in high quality, moderately priced uthentic
Italian pasta dishes and pizzas. The restaurant has recently decided to implement a balance scorecard approach.
2022 2023
Total customers 11,600 12,000
- of which are new customers 4,400 4,750
-of which are existing customers 7,200 7,250
Customer complaints 464 840
Time between taking order and
customer receiving meal
4 mins 13 mins
% Staff turn over 12% 40%
% time staff spend training 5% 2%
Revenue $110,000 $132,000
- revenue from new dishes $22,000 $39,000
-reveue from existing dishes $88,000 $92,400
Gross Profit S22,000 $30,360

36. XIV. The Balance Scorecard: Advantages and Disadvantages
It can be seen as an extension of the use of a range of performance indicators, including non-financial measures and a
move away from the traditional over-reliance on profit based and other financial measures.
Advantages:
• Uses four perspectives
• Less able to distort the performance measure
• Harder to hide bad performance
• Long term rather than short term
• Focuses on KPIs
• KPIs can be changed as the business changes
Disadvantages:
• Large numbers of calculations
• Subjective
• Comparison with other businesses is not easy
• Arbitrary nature of arriving at the overall index
of performance

37. XV. Benchmarking
• It is a technique that is increasingly being adopted as a mechanism for continuous improvement.
• It is the establishment, through data gathering, of targets and comparators, that permit relative levels of
performance (and particular areas of underperformance) to be identified. The adoption of identified best
practices should improve performance.
It therefore requires organization to:
 Identify what they do and why they do it
 Have knowledge of what the industry does and in particular what competitors do
 Be fully committed to achieving best practice

38. XV. Benchmarking: Types and Levels of Benchmarking
1. Internal benchmarking: With internal benchmarking, other units or departments
within the organization are used to benchmark. This is possible if the organization is
large and divided into a number of similar regional divisions.
2. Competitive benchmarking: The most successful competitors are used to
benchmark. Competitors are unlikely to provide willingly any information for
comparison, but it might be possible to observes competitor performance ( for
example, how quickly a competitor processes customer orders).
3. Functional benchmarking: Comparisons are made with a similar function in the
organizations that are not direct competitors. For example, a fast-food restaurant
operator might compare its buying function with buying in a supermarket chain.
4. Strategic benchmarking: It is a form of competitive benchmarking aimed at
reaching decisions for strategic action and organizational change. Companies in the
same industry might agree to join a collaborative benchmarking process, managed by
an independent third party such as trade organization.

39. PLANNING
• Selecting the activity to be benchmarked, involving fully
the staff engaged with that activity and identifying the key
stages of the activity relating to inputs, outputs and outcomes.
Analysis
• It includes identifying the extent to which the
organization is under performing and to stimulate ideas as to
how this can be met.
Action
• It involves putting an appropriate plan into force in order
to improve performance in the benchmarked areas.
Review
•It includes monitoring progress against the plan and reviewing
the appropriateness of the performance measure.
Steps Involved in
Performance
Benchmarking
Process