Download - Measuring Up: Performance Reporting and Measuring MIR 889 Andrew Graham Queen’s University
Measuring Up: Performance Reporting and Measuring
MIR 889Andrew Graham
Queen’s University
Why Measure?
• To know how you are doing relative to:• Plan• Competition• Change pressures• Benchmarks• Targets• Commitments
Why Measure?
• To identify improvement opportunities.• To make decisions based on facts and
data that everyone agrees on and understands
• Measure changes to stakeholders wealth; put in simple terms, the value of a firm.
• To be able to adjust to changing realities.
Limitations of Financial Performance MeasuresFinancial measures tend to be lag
indicators -“After the fact”Management also needs lead
indicators -“Before the fact”Lag focuses on variance,
comparison to plan, ratios – all good and useful
Lead focuses on resilience, adaptation, risk and opportunity
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Lead indicators as value driversMany non-financial indicators can serve
as lead indicators in certain settings.Common examples are:
◦Market share, backlog (book-to-bill ratio), new product introductions, new product development lead times, product quality, customer satisfaction, employee morale, personnel development, inventory turnover, bad debt ratio, or safety
Lag IndicatorsIn contrast to lead indicators, lag indicators are
measures that point to earlier plans and their execution.
Financial performances are lag indicators.Many times, financial performances are too late
to affect future products and services.Therefore, we need multiple measures that
include both financial and non-financial measures.
Performance Measurements In a Changing World
In the global, technology-driven, decentralized environment, measuring
Financial performance, while important, is not adequate.
Even if less than precise, other measures of performance are required.
These measures should be capable of measuring multiple attributes of an organization.
Mission – What we do
Vision – What we aspire to be
Strategies – How we accomplish our goals
Measures – Indicators of our progress
The Strategy Focused Organization
Environmental Scan
Strengths Weaknesses
Opportunities Threats
Values
Mission &Vision
Strategic Issues
Strategic Priorities
Objectives, Initiatives, and Evaluation
A Model forStrategicPlanning
Strategic DirectionCreate Environment
For Change Strategic Performance Management System
Linking it all together….
Communicate StrategiesDefine ObjectivesImplement BSC
Balanced ScorecardMeasure Performance
Improve Processes
Evaluate and AdjustContinuous Improvement
Redefine Initiatives
The Balanced ScorecardWhat is it?
The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.
Balanced ScorecardManagement must consider both
financial and operational performance measures
Measures should be linked with company goals and strategy
Financial measures are only one measure among many
Uses key performance indicators
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COMPANY GOALS
CRITICAL FACTORS
KEY PERFORMANCE
INDICATORS
Examples of critical factors and corresponding KPIs
Operational
efficiency
Employee
excellence
Financial profitabili
ty
Market share
Yield rateTraining hours
Revenue growth
Customer satisfactio
n
Four Perspectives
Financial Customer
Internal Business
Learning and
Growth14
Financial PerspectiveHow do we look to shareholders?
◦Ultimate goal is to generate income for owners
KPIs: ◦Sales revenue growth◦Gross margin growth◦Return on investment◦Working capital used
Financial Ratio Analysis◦Performance relative to expectations◦ Industry comparisons
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Customer PerspectiveHow do customers see us?
◦Top priority for long-term successCustomer concerns:
◦Product price◦Product quality◦Sales service quality◦Product delivery time
KPIs:◦Customer satisfaction◦Market share◦Number of customers and repeat customers◦Rate of on-time deliveries
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Internal Business PerspectiveAt what business processes must we excel?
Three factors:◦ Innovation
KPI: Number of new products developed
◦Operations KPIs:
Product efficiency – number of units produced Product quality – defect rate
◦Post-sales service KPIs
Number of warranty claims Average wait time on phone for customer service
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Learning and Growth Perspective
How can we continue to improve and create value?
Three factors:◦1) Employee capabilities
KPIs: Hours of employee training Employee commitment and turnover Number of employee suggestions implemented Dollars per worker on Workers Compensation Sales dollars per worker
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Learning and Growth Perspective◦2) System capabilities
KPIs: Percentage of employees with online access to
customer data Percentage of processes with real-time feedback
◦3) Company’s climate for action◦ A balance of responsibility and
authority
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Performance Reports
Report financial performance of responsibility centers
Cost center Difference between actual results and budget Changes in labor dollars or hours Changes in purchased price vs. quantity
discountRevenue center
Variance due to selling more or less units than expected
Variance due to price changesProfit center
◦Focus on both revenue and cost variances20
Performance ReportsManagement by exception
◦Only material variances are investigated
Should focus on information, not blame
Some variances are uncontrollable◦Example: increase in costs due to a
natural disaster
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Performance ReportingVariances
◦ Differences between budgeted and actual amounts.
Audit◦ A systematic process of objectively
obtaining and evaluating evidence of the firm’s performance, judging the accuracy and validity of the data, and communicating the results to interested users.
Financial Ratio◦ An arithmetic comparison of one financial
measure to another, generally used to monitor and control financial performance.
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Example of a Performance Report
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Widely Used Financial Ratios
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Widely Used Financial Ratios
LIS580- Spring 2006 26
Widely Used Financial Ratios
May 16, 2006
FIGURE 14–7cG.Dessler, 2003
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Widely Used Financial Ratios
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Ratio Analysis: Factors Affecting Return on Investment
Caution
Ratios are valuable, but…..◦ They do not provide answers in an of
themselves and are not predictive◦ They should be used with other
elements of financial analysis◦ There are no “rules of thumb” that apply
to interpretation of ratios
Limitations of Performance Measures
Measurement issues◦Total asset figure in equation
Nonproductive assets Gross book value vs. net book value Depreciation may artificially inflate
measures
Short-term focus◦Figures are for a one-year time frame◦Incentive to management to cut
essential spending to increase measurement
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