Performance Measurement

2 Performance measures recently introduced or being considered for introduction Balanced Scorecard Approach Economic Value Added (EVA®) Value Drivers Shareholders Value Analysis (SVA) Economic profit Cashflow return on investment Target cashflow Return on capital employed (ROCE) Target profit

3 Use of Divisional Performance Measures in UK companies (source: Francis And Minchington, 2000) Ability to stay within budget Used Being considered Not being considered Not aware of 99 1%0% Target profit 94%3%2%1% Return on capital employed (ROCE) 71%6%18%5% Target cash flow 70%7%17%6% Value Drivers 28%18%35%19% Balanced Scorecard Approach 24%21%29%26% Shareholders Value Analysis (SVA) 15%13%53%19% Economic Value Added (EVA®) 10%18%46%26% Residual Income (RI) 6%2%56%36%

4 Financial and non-financial measures commonly used in assessing performance WORKING CAPITAL Cashflow Creditor days Debtor days GENERAL PRODUCTION Capital utilization Inventory DEMAND Market share Orders on hand CAPITAL MARKET Asset value per share Dividend cover Dividend per share Earnings per share Price/earnings ratio PROCESS Manufacturing lead time per cent rework and reject per cent yield on production Schedule adherence Set-up time PRODUCT Price ( both low-price and low-cost supplier ) Product quality Returns Incidence of defects (PPM) Warranty claims Field service requests (FINANCIAL) RETURN Capital turnover Working capital turnover Profit to turnover Return on capital employed Profit Total shareholder returns Profit per employee Economic value added Sales per employee LABOUR Direct labor productivity Indirect labor productivity Employee turnover Employee satisfaction Involvement with decisions Recognition for doing good job Support level from staff fnctions Encouragement to be creative Employee retention CUSTOMER Customer Acquisition Satisfaction Complaints Repeat orders Retention & loyalty On-time delivery (OTD) Account share Profitability LENDER SECURITY Gearing Interest cover SUPPLIERS Number of suppliers Supplier lead time INNOVATIVENESS New product frequency New product time to market

5 Financial control  Financial control involves the use of financial measures to asses organization and management performance  Variance analysis is the oldest and most widely used forms of financial control  Financial indicators used for asses performance depend on the type of responsibility center

6 Responsibility centers and financial indicators  Using segment margin reports  Transfer pricing International transfer pricing Domestic transfer pricing  Return on investment  Using Residual Income  Using economic value added (EVA®)