Control systems and performance measurement
9 important questions on Control systems and performance measurement
Benefits of non-financial measures
* They provide indirect quantitative information on a company's intangible assets
* They can be good indicators of future financial performance
* They can improve manager's performance by providing more transparent evaluation of their
actions
Costs of non-financial measures
* They do not have a common denominator and entail different denominators such as time,
percentage, quantities etc.
* They sometimes lack verifying links to accounting profits or stock prices and may have
weak statistical reliability.
* They may be too numerous to translate into main drivers of succes
Alternative definitions of Investment
(All assets are included)
2. Total assets employed
(Total assets - idle assets - assets purchased for future expansion)
3. Working capital + long-term assets)
(Current assets - current liabilities
4. Shareholders' equity
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4 Approaches of performance measures
2. Residual income (RI)
3. Economic value (EVA)
4. Return on sales (ROS)
The Dupont method for analysis of profitability
This method recognizes that there are 2 basic ingredients in profit making:
1. using assets to generate more revenue
2. increasing income per euro of revenue
An improvement in either ingredient without changing the other, increases return on investment.
Examples of reducing investments
no income for the owner
* Managing credit carefully
* Determining proper stock levels
* Spending carefully on fixed assets
Return on sales (ROS)
Return on sales (ROS) % = Operating profit / Revenues (sales)
ROI based on Net book value vs Gross book value
Steps in designing an accounting-based performance measure
2. Defining the terms
3. Measuring the items included in the variables
4. Choosing a target for performance
5. Choosing the timing of feedback
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