Performance Measurement

Chapter 14
pp 281-299
Case Studies: “Tex Rob” pp299-303
“When NICE isn’t good enough” pp15-18
Primary Reports
Production and inventory planning and control are
part of primary reports. These reports normally
include the following:
 Planned orders, a schedule indicating the
amount and timing of future orders
 Order releases, authorising the execution of
planned orders
 Changes to planned orders, including revisions
of due dates or order quantities and
cancellation of orders.
Secondary Reports
Performance control, planning, and exceptions
belong to secondary reports.
 Performance-control reports evaluate system
operation eg. deviations, missed deliveries,
stock outs.
 Planning reports forecast eg inventory
requirements.
 Exception reports show discrepancies eg late
and overdue orders, scrap rates, errors.
Profitability

Refer example p. 288

2. As a business “owner” would you be
happy with the “return on shareholders
funds” as shown?
Liquidity

Refer example p. 287

2. Describe what is meant by “liquidity” and
“solvency” using the data provided.
3. What is a “ratio” and why is it a useful
measure in this case?
Extract Financial Performance

Operational Performance
Sales 20,000
Direct costs (8,000)
Gross Contribution 12,000

Employee Costs (2,200)

Operating Costs (1,400)
Management Costs (400)
Admin costs (1,000)
Marketing & Advertising (1,000)
Financing costs (500)

Less Overheads (6,500)

Surplus Before Tax 5,500

Add interest 500

EBIT 6,000
 The Financial Position

Fixed assets -------100

Current Assets
Debtors 35
Stock 15 Management
--------------------------+ 50
Current Liabilities
This is the Total Creditors
Assets(Fixed+ -------------------------- (40)
Current) minus
the Current TA - CL ----------- 110
Liabilities
Debt 40
Equity 70
Ownership
Funding --------------- 110
Financial Position & Financial Performance

0 1 P&L 2 P&L 3 P&L 4

BS
BS BS BS
FA
+CA
- CL

External Debt and

Equity
KPI’s – Using Financial Indicators

EBIT Measuring the

Return on Total Assets =
whole company
Total Assets

EBIT Measuring
Return on Net Assets =
Management
Net Assets Performance

EBIT Sales
X
Sales Net Assets

Profitability Asset Utilisation

 A few Key ratios
Relevant to Operational Managers

Profitability Ratios Asset Utilisation

Direct Costs / sales
Closing Inventory to sales (efficiency)
Gross Margin
Employee Costs/Sales % Fixed Asset Utilisation
Marketing/Sales % Current Asset Utilisation
Operations/Sales % Liquidity Ratios
Management / Sales % Trading Efficiency
Administration /Sales % Breakdown of ROE
Occupancy /Sales % Debt Ratios
Financing /Sales % Gearing Ratios
Depreciation/Sales % Debt gearing
Profit (Surplus)/ Sales % Income Gearing
EBIT/Sales
Tax
NOPAT/Sales %
Profitability

Refer: “When NICE isn’t good enough”

pp15-18
Assuming “capital expenditure” reads
“general expenses”.
 What has been happening to “profit”?
 What are the reasons for changes,
implied in the figures?
 What can the owner do with the balance
shown in the Profit & Loss extract?
 A Typical Example
Mar-87 Mar-88 Mar-89 Mar-90 AVG
Business Level Ratios:
EBIT/Net Assets % (RONA) 15.0% 16.9% 21.6% 17.83%
EBIT/Sales % 2.9% 3.0% 3.2% 3.06%
Sales/Net Assets 5.08 5.58 6.77 5.81
Income Growth Ratios 52% 54% 19% 34% 39%
EBIT Growth 22.0% 41.0%

Cost of Sale 72% 71% 72% 71.93%

Purchases / Sale % 75.3% 75.7% 75.8% 75.61%
Closing Inventory / Sale % 14% 16% 16% 15.26%
Gross margin 28.0% 28.6% 27.6% 28.07%
Key Operating Ratios
Total Overheads / Sales 25.8% 26.6% 25.6% 26.01%
Management Costs / Sales 4.4% 4.2% 3.5% 4.06%
Operations Costs/Sales 21% 21% 21% 20.96%
Financing Costs / Sales 0.8% 1.0% 1.2% 0.99%
NOPAT / Sales % 1.97% 2.03% 2.14% 2.05%

Note: This is a teaching example for operations management and should be treated with caution
 Fixed Asset Utilisation :
Sales / Fixed Assets 13.47 14.38 17.16 15.00
Increase In F Assets / Sale 4% 2% 3%
Current Asset Utilisation :
Sales / Current Assets 3.63 3.58 3.47 3.49
Debtors / Sales % 10.1% 11.0% 11.8% 10.96%
Creditors/Sales % 7.3% 9.5% 9.5%
Rough Trading Efficiency
Debtors days to Pay 37 40 43 39.99
Creditors Days to Pay 38 50 50 46.06
Liquidity Ratios :
Current Assets / Current Liabilities 1.8 1.6 1.5 1.61
Liquid Assets / Current Liabilities 0.9 0.7 0.7 0.76
Working Capital / Sales % 12% 11% 9% 10.73%
Inc in Inventory / Inc in Sales % 27% 14% 20.4%
Debt/Gearing Ratios :
Total Debt / Book Value of Equity 24% 19% 14% 18.94%
Income Gearing ( Interest / EBIT ) 26.0% 32.8% 38.4% 32.39%
Corporate Ratios
Total Assets /Total Liabilities 1.83 1.70 1.59 1.71

Note: This is a teaching example for operations management and should be treated with caution
Resource Utilisation

Refer to text pp 289-290

What are the positive and negative aspects

of budgetary control?
Evaluation of Tex Rob

Refer to the case study:

What is your general opinion of Tex Rob’s
performance measurement? Back up
your opinion through referencing the 4
key measurement areas.