1 Block 5: Session 3 (Part 1) Organization financial measurement:- The main aim of this section is to introduce you to several ways in which org. attempt to manage their overall performance, by integrating different types of performance measures and departmental or sub-unit performance management activities. We will focus on financial and operations functions. Part 1: Org. financial measurement: –The org. must be measured and managed holistically, from a financial perspective, this means being concerned with three fundamental matters: 1.Liquidity. 2.Profitability, break-even. 3.Financial structure Liquidity: Liquidity refers to an org. being able to generate the cash that it needs to continue its operations and meet its short-term obligations. Why is cash so important? People and org. will not normally accept other than cash in settlements. (employees get paid in cash). Buying fixed assets, to finalize or get a better deal, cash is always the most powerful tool in transactions. Purchase of short-term inputs (stocks, raw materials..etc.)

2 Block 5: Session 3 (Part 1) Organization financial measurement:- Sales of outputs. Customer credit and accounts receivables. Supplier and bank credit. –Measuring and managing working capital (C/assets. C/liabilities, Acct/rec. Acct/payable, stock, short-term investment and short-term loans) is a significant part of ensuring that an org. neither lacks liquidity nor has too much liquidity. –An org. might have all 4 functions running smoothly (management of people, efficient org. operations, effective marketing and operations) but useless if working capital is not efficient. The nature and purpose of working capital: –Working capital is usually defined as current assets less current liabilities. –Major elements of current assets are: Stocks Trade debtors. Cash. –Major element of current liabilities is: Trade creditors –Manufacturing companies invest heavily in raw- materials, working-in-progress, and finished goods, and will often sell its goods on credit, thereby generating trade debtors, on the other hand, retailers sell goods for cash. –Management of working capital is an essential part of the short-term planning process, management should weight the benefits between investing or the cost associated with the elements of working capital and uses of funds in other ways. –Working capital changes over time as a result of changes in the bus. Environment, internally and externally.

3 Block 5: Session 3 (Part 1) Organization financial measurement:- Management of stocks: –Holding stock vary between org. due to the nature of operations of those org. some hold more than it is necessary, due to the nature of operations or due to the believe that future supplies may be interrupted or scarce or that the cost of stocks will rise in the future. On the contrary some companies may not hold any stock at all, or a mix of materials. –Forecasts of future demand is essential to try to ensure that there will be stock available to meet future sales, it is important to ensure the accuracy of theses forecasts. Financial ratios: –One ratio that can be used to help monitor stock levels is the stock turnover period. –Stock turn-over period = Average stock held X 365 Cost of sales –This will provide a picture of the average period for which stocks are held. Stock management models (EOQ) MRP JIT stock management Management of debtors: –Which customer the org. is prepared to offer credit to?( risk of not getting paid) Five Cs of credit P.310 –Length of credit period. The typical credit terms operating within the industry. The degree of competition within the industry. The bargaining power of the customer. The risk of non-payment. The capacity of the bus. To offer credit. The marketing strategy of the business.

4 Block 5: Session 3 (Part 1) Organization financial measurement:- Cash discount: –A business may decide to offer a cash discount in an attempt to encourage prompt payments from its credit customers. –Self assessment Q p.314 answer p.386 Collection policies: –A business offering credit must ensure that amounts owing are collected as quickly as possible. –Management can monitor the effectiveness of collection policies in a number of ways –One method is to calculate the “ Average settlement period for debtors ratio” = Trade debtors X 365 Credit sales –It is an average figure for the number of days for which debts are outstanding. –Also “ Ageing schedule of debtors”. Debts are divided into categories according to the length of time the debt has been outstanding. The management of cash: –Why hold cash? –Activity 11.7 p.317 The management of trade creditors: –Trade credit is regarded as an important source of finance by many businesses. But the cost associated with this is that customers who pay on credit may not be as favoured as those who pay cash immediately.

5 Block 5: Session 3 (Part 1) Organization financial measurement:- Example: –ABC Ltd takes 70 days to pay for goods supplied, the supplier offered 2% cash discount if payment is made within 30 days. Should ABC make the payment in 30 days and benefit the 2% discount or is it better off paying in 70 days the full amount? –To answer we must calculate the cost of foregoing the benefit. –I the company chooses not to pay in 30 days, it will benefit an extra 40 days to make the payment in full( 70-30), but the cost is not taking the 2% discount. –If we annualize the cost = 365/40 X2% = 18.3 %. –Which is high, the company should be better off if to take advantage of the offer and pay within 30 days and get the 2%, even if it has to borrow to pay. –In order to monitor the level of trade credit taken, average settlement period = Trade creditors X 365 Credit purchases Profitability & break-even: –Org. need money for survival by bringing in at least as much money as they need to cover their costs, this is equivalent to being economical in terms of inputs acquired, efficient in terms of transforming inputs into outputs, and effective in terms of what customers want to buy, all these add up to being profitable. –Break-even analysis & point Block 3.

6 Block 5: Session 3 (Part 1) Organization financial measurement:- 3.Financial structure: It refers to how a company will finance their sart-up costs, and activities- ranging from buying land, cars, equipment, raw- materials…etc. This can be done with cash or business loans, shareholders, loans from a bank, Which is better? Figure 3.1 p.81