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Alternative measures of Performance

Explore the shortcomings of financial indicators and the importance of non-financial performance indicators in evaluating business performance. Learn about benchmarking, company strategy, and how to interpret ratio analysis effectively.

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Alternative measures of Performance

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  1. Alternative measures of Performance Management Level – Paper P2 Advanced Management Accounting Lecture - 15 Vidya Rajawasam ACMA CGMA MBA

  2. Alternative measures of Performance In the previous lectures we have discussed • Examples of Residual income and Return on Investment • Economic Value Added

  3. Alternative measures of Performance In this lecture we will discuss • Shortcomings of financial indicators. • Non-financial Performance indicators. • Benchmarking

  4. Alternative measures of Performance Shortcomings of financial indicators. Although traditional financial performance Metrics have widespread acceptance, there are certain shortcomings that can be highlighted. • They only indicate what has happened over a limitedperiod of time, related to the immediate past. • There is no clearindication of what will happen in the future.

  5. Alternative measures of Performance Shortcomings of financial indicators. • They are subjected to manipulation. The choice of accountingpolicies used such as depreciation method, valuation of inventory can distort the comparison of business operations or business units.

  6. Alternative measures of Performance Shortcomings of financial indicators. • Business conditions. You need to place ratioanalysis in the context of the general business environment. For example, 60 days of sales outstanding might be considered poor in a period of rapidlygrowingsales, but might be excellent during an economiccontraction when customers are in severe financial condition and unable to pay their bills.

  7. Alternative measures of Performance Shortcomings of financial indicators. • Interpretation. It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position.

  8. Alternative measures of Performance Shortcomings of financial indicators. A more detailed analysis might reveal that the current ratio will only temporarily be at that level, and will probably decline in the near future.

  9. Alternative measures of Performance Shortcomings of financial indicators. • Company strategy. It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lower gross margin in exchange for more market share.

  10. Alternative measures of Performance Shortcomings of financial indicators. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company.

  11. Alternative measures of Performance Shortcomings of financial indicators. • Historical versus current cost. The information on the incomestatement is stated in currentcosts (or close to it), whereas some elements of the balancesheet may be stated at historicalcost (which could vary substantially from current costs). This disparity can result in unusual ratio results.

  12. Alternative measures of Performance Shortcomings of financial indicators. • Not related to the strategic Management, the analysis generally focuses on short term ratios and therefore, there is a possibility to ignore long term aspects of business operations related to quality , efficiency ,motivation etc…

  13. Alternative measures of Performance Shortcomings of financial indicators. • Inflation. If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across periods. For example, if the inflation rate was 100% in one year, sales would appear to have doubled over the preceding year, when in fact sales did notchange at all.

  14. Alternative measures of Performance Non financial Performance indicators. When an organization wants to conduct a fuller evaluation of performance not only based on financial performance indicators alone, they should consider about Non-FinancialPerformanceIndicators (NFPI).

  15. Alternative measures of Performance Non financial Performance indicators. CIMA Terminology Non-financial Performance Indicators are measures of performance based on non-financial information that may originate in and be used by operating departments to monitor and control their activities without key accounting input.

  16. Alternative measures of Performance Non financial Performance indicators. The Non-financial Performance Indicators may provide timelycommunication of levels of performance achieved by the business organization compared to financial performance indicators. Furthermore, the non financial indicators are less susceptible to distortion factors such as uncontrollablevariances related to marketforces and operations.

  17. Alternative measures of Performance Non financial Performance indicators. The Non-financial Performance Indicators can be expressed in quantitative and qualitative terms. For example, the company can indicate that they have 5% market share which is a quantitative measure and also they can indicate that the company is one of the first preferred suppliers for a well established customer.( Qualitative measure).

  18. Alternative measures of Performance Review MCQs The shortcomings of financial indicators ? • Focus on limited period of time. • Reduction in head office bureaucratic controls • Supports better pricing decisions • Unable to predict future activities and outcomes.

  19. Alternative measures of Performance Review MCQs The shortcomings of financial indicators ? • Focus on limited period of time. • Reduction in head office bureaucratic controls • Supports better pricing decisions • Unable to predict future activities and outcomes.

  20. Alternative measures of Performance Review MCQs What is the true statement related Non Financial Performance Indicators ? • They are sub set Financial indicators. • Responsible for revenues generated from the operations. • They can be quantitative as well as qualitative. • Non of the above.

  21. Alternative measures of Performance Review MCQs What is the true statement related Non Financial Performance Indicators ? • They are sub set Financial indicators. • Responsible for revenues generated from the operations. • They can be quantitative as well as qualitative. • Non of the above.

  22. Alternative measures of Performance Types of Non financial Performance indicators.

  23. Alternative measures of Performance Types of Non financial Performance indicators.

  24. Alternative measures of Performance Types of Non financial Performance indicators.

  25. Alternative measures of Performance Types of Non financial Performance indicators.

  26. Alternative measures of Performance Types of Non financial Performance indicators.

  27. Alternative measures of Performance Types of Non financial Performance indicators.

  28. Alternative measures of Performance Types of Non financial Performance indicators.

  29. Alternative measures of Performance Types of Non financial Performance indicators.

  30. Alternative measures of Performance Benefits of non-financial performance indicators • NFPIs can improvestrategyexecution by aligning business activities and individual actions with strategic objectives • Well-designed NFPIs can provide a means for management and the board to monitor core activities of the business rather than simply outcome measures of financial success.

  31. Alternative measures of Performance Benefits of non-financial performance indicators • Integration of financial and non-financialKPIs can contribute to a greaterfocus on long-term success rather than short-term financial performance.

  32. Alternative measures of Performance Drawbacks of non-financial performance indicators • Time and Cost (cost of measurement may exceed benefit.) • Difficulty in obtaining relevant information

  33. Alternative measures of Performance Drawbacks of non-financial performance indicators • Noagreedformulae for non-financial indicators – harder to compare, dependent on timing, results are expressed in different formats (time, percentages, quantities etc).

  34. Alternative measures of Performance Drawbacks of non-financial performance indicators • May be a lack of causal link between company efforts and certain non-financial results meaning focus can be on uncontrollable or unimportant factors.

  35. Alternative measures of Performance Questions to consider when implementing NFPIs? • What customer, human capital, operating, supply chain or pipeline measures do we need to monitor? • Can we collect meaningful data in a cost-effective manner for each of the desired measures?

  36. Alternative measures of Performance Questions to consider when implementing NFPIs? • What customer, human capital, operating, supply chain or pipeline measures do we need to monitor? • Can we collect meaningful data in a cost-effective manner for each of the desired measures?

  37. Alternative measures of Performance Review MCQs What is not part of competitive NFPIs ? • Measures market share by product • Measures Sales growth by product. • Identifies the activities and costs related to distribution channels. • Measures size of the customer base.

  38. Alternative measures of Performance Review MCQs What is not part of competitive NFPIs ? • Measures market share by product • Measures Sales growth by product. • Identifies the activities and costs related to distribution channels. • Measures size of the customer base.

  39. Alternative measures of Performance Review MCQs Drawbacks of NFPIs? • Can be costly and time consuming • Not able to support quality assurance programs . • There can be difficulties in obtaining relevant information. • Unable to Identify the revenue and costs related to a particular operation.

  40. Alternative measures of Performance Review MCQs Drawbacks of NFPIs? • Can be costly and time consuming • Not able to support quality assurance programs . • There can be difficulties in obtaining relevant information. • Unable to Identify the revenue and costs related to a particular operation.

  41. Alternative measures of Performance Lecture Summary We have discussed the • Shortcomings of financial indicators. • Non-financial Performance indicators. • Benchmarking

  42. Alternative measures of Performance Management Level – Paper P2 Advanced Management Accounting Lecture - 15 Vidya Rajawasam ACMA CGMA MBA

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