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Measuring performance: The accounting perspective (2.Financial measurment…
Measuring performance: The accounting
perspective
The role of financial aspects of performance
2.Financial measurment as...
...as tools of financial managment
Roles of financial managment
Managment of the financial resources of the organization
Ensurement of not breaching of the financial constraints
INSTRUMENTS
Financial plans
Cash flow planning
Profitability
Assets and the provision
of finance for their purchase
Pyramid of
ratios
Key ratious
Inventory turnover period
Debtors to sales ratio
Quick ratio
Creditors to purchases ratio
Current ratio
...as major objective of a business organization
Performance indicators for shareholders
Profit
EPS (earnings per share)
Accounting earnings is a matter of judgment
Reported accounting earnings is a weak surrogate for overall shareholder return
Price/earnings (P/E)
Measurment of rate of return that may be expected by shareholders
CAMP (capital asset pricing model)
Disadvantages of the model
The expected return depends upon...
...the risk-free rate
of return
...the riskiness of the particular
investment
... as mechanisms for motivation and
control
Accounting approaches to control
Responsibility centers
1) Investment centers
Return on capital as mesure
2) Profit center
Profit as mesure
3) Cost centers
Other (non-accounting) measures
Problems
The transfer pricing issue
The issue of manager profit target
Residual income (or EVA) as overcoming of these problems
Correlation beween EVA and share price
Accounting measures alone can't represent the “drivers” of performance
Performance drivers
The balanced scorecard approach
Why is the balanced scorecard approach a good vehicle for structuring an array of performance measures?
1) Explicit link between the espoused strategies of an organization and the performance measures it uses
2) The four major areas in which performance measures are to be devised (financial, customer, business process, and innovation and learning) closely match the main stakeholders of the organization
3) A clear attempt to model the main drivers of future performance
4) The requirement that there are no more than four performance measures in each area
Connections between the approaches
For any particular accounting measure to be used for more than one of these functions :!:
EXAMPLE:budgetary control
Comflict between the two functions of budget
Functions of budget
A budget as financial plan for ensurement of not breaching of the financial constraints
A budget as a tool of overall management control