SECONDARY BUSINESS STUDIES & ACCOUNTING PROFESSIONAL DEVELOPMENT AND NETWORKING DAY

1. SECONDARY BUSINESS STUDIES & ACCOUNTING PROFESSIONAL DEVELOPMENT AND NETWORKING DAY SESSION 3: KEY PERFORMANCE INDICATORS Presented by: Evelyn Hogg, Senior Lecturer, Notre Dame School of Business

2. KPIs – syllabus areas • Accounting & Finance: • Predominantly unit 3B: Evaluating financial information for planning, coordinating, controlling and investing • Also relevant to others: • Unit 1A: Personal financial planning • Unit 1B: Evaluating business performance from a cash perspective • Unit 2A: Measuring effectiveness of internal controls • Unit 3A: Purpose & functions of performance reports, and business planning

3. Business Management and Enterprise • Unit 1A: Strategies & processes: the manager’s role: planning, organising, leading, controlling • Unit 1B: Strategies & processes: human resources: the value of performance management • Unit 1C: Strategies & processes: management: responsibility and accountability • Unit 1D: Strategies & processes: management: evaluating and improving efficiency of internal business activities

4. Business Management and Enterprise • Unit 2A: Strategies & processes: management: monitoring success through regular reviews • Unit 2B: Strategies & processes: management: introduction to key performance indicators • Unit 3A: Strategies & processes: operations: financial management and control • Unit 3B: Strategies & processes: management: the concept of a balanced scorecard, and operations: overview of financial and non-financial key performance indicators

5. Why do we need performance measurement? • Planning is an important function of business managers • Strategic • Budgeting and forecasting • How do they know they are achieving their goals?

6. Goal congruence • Incentives • Organisational objectives: • Financial • Popular with accountants • Non-financial • May be more timely and involve people involved at the point of production or rendering of service

7. What are performance measures or indicators? Measure progress towards goals Measure how organisation and individuals within the organisation are performing relative to their targets Can be hundreds of these measures

8. How does an organisation decide which ones to measure? • Must select those measures that are critical to the achievement of their most significant goals • Hence the name “key performance indicators” • Are usually long term • Must be quantifiable

9. SMART KPIs Specific Measurable Achievable Relevant Timely

10. How many KPIs? • Limit them to factors essential to meeting its goals • At organisational level, should not be more than 3 or 4 • At business unit level, have 3 or 4 that support the overall organisational KPIs and can be “rolled up” into them

11. Example 1

12. Good and Bad KPIs • Examples: • Title of KPI: Employee turnover • Defined: (Total number of employees that resign plus number of employees terminated) divided by number of employees at start of year • Measured: Data as gathered by HR department of employees leaving • Target: Reduce employee turnover by 5% per year • Is this a good or bad KPI?

13. Examples: • Title of KPI: Increase Sales • Defined: Change in sales volume from month to month • Measured: Total of sales by region for all regions • Target: Increase each month • Is this a good or bad KPI?

14. Quiz: Good or bad KPIs? • Based on Teen Teez information, decide whether the following are good or bad KPIs: • The production team should achieve a 10% reduction in re-work in 6 months • We will grow our market share • We want to reduce our transport costs • We want to increase market share in 2010 by 3% over the 2009 level

15. Business aspects that require KPIs Customer satisfaction Employee satisfaction Staff turnover Absenteeism Department / division-specific measures Triple bottom line: financial, environmental & social reposnsibility

16. Revenue and costs OHS reporting including incidents and related costs Equipment usage Maintenance costs and effectiveness New product development and innovation Lead times and down times Quality

17. KPI components • KPIs should identify the required outcomes, for example: • The minimum acceptable performance level • Target performance • KPIs should not measure performance in isolation • Can have adverse behavioural effects

18. Example 2

19. Data collection for KPIs • Answer three questions first: • What is the purpose of collecting this data? • Will this data tell us what we want to know? • Will we be able to act on the data we collect?

20. Questions to answer when setting up a data system for KPIs: • What type of metric is it (financial, behavioural or core process) • Why was it selected? • Where will the data be collected from? • How will the data be collected? • How often will the results of the data collected be made known? • Who will use the information?

21. Financial vs. Non-Financial KPIs • Financial • Are important, because focus of shareholder value • Could be absolute $ amounts • Could be ratios • Eg. Contribution margin, GP%, current ratio, etc

22. Non-Financial • Often reflect the drivers of future financial performance (eg. improved quality) • Tend to be more actionable • Tend to be easier to understand and relate to (eg. “Number of rejects per 1000” as opposed to “variable overhead efficiency variance”)

23. Example 3

24. THE END QUESTIONS?