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Summary Business Performance Measurement
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Summary Business Performance Measurement Chapter 1 - 8, 11 - 14, 18, 20-22 A. D. Neely 2nd edition 9780521188760
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Business Performance ManagementChapter 1: Accounting performance measurement: a review
of its purposes and practices
The three main functions for the use of financial performance measures
Financial management. This is about the provision and use of capital. It is home to
the financial function.
Financial performance as an organizational objective. Here you want to measure the
success of an organization (Sales, Revenue, ROI etc.)
Financial performance as a motivation and tool for control.
The financial function
Is to manage the firm’s financial resources to ensure that the financial constraints it faces are
not breached (this might lead to bankruptcy). It is the management of capital.
2 main components of the financial function
Financial planning: making budgets (or financial plans) that outline the necessary
financial outcomes to meet the organization’s commitments.
Financial control: the process of monitoring financial plans and taking corrective
actions on deviations from these plans.
The 3 focus points for financial plans
Cash flow planning: making sure that enough cash is available to meet payments
(cash flow statement)
Profitability: acquiring resources at a higher rate than using them. Net cash flows and
total profit can be totally different! This can lead to bankruptcy. (Profit and Loss
statement)
Assets and their purchase. The difference between cash flow and profit is caused on
the one hand by paying for equipment that pays itself back over time and on the
other hand by timing differences between payment and receipts (this is required for
sufficient working capital). (Balance Sheet)
The ratio pyramid
The pyramid of ratios is used in financial management. It is the most powerful tool to
report on the acquisition and favorableness of the use of financial resources.
The top of the pyramid is about the ROA of the company as a whole (or return on
capital employed).
The secondary ratios are the profit margin on sales (net profit/sales) and capital
turnover (sales/capital employed). The tertiary ratios are profit (revenue-cost of
sales), and the division of capital employed in current assets and fixed assets.
, The 5 ratios connected to cash flows and liquidity
Current ratio: current assets/current liabilities
Quick ratio (acid test): (current assets-inventories)/current liabilities
Inventory turnover period: inventories/cost of sales, expressed in days or months
Debtors to sales ratio
Creditors to purchases ratio
The ratios related to a more longer-term profitability
Profit to sales: profit margin
Value added: revenue-cost of supplies
The ratios related to raising capital
These ratios are more about financial structure of the organization
Debt to equity: this ratio is an indication of leverage, and therefore risk
9. Explain the following sentence: The role of financial performance measurement is to help
keep the organization on a financial track that is “straight and narrow”.
This sentence implies the construction of a vicious circle of making sure that there are
sufficient net cash inflows to pay financiers and contribute to new investments. With sound
profitability, financiers are willing to make additional investments in addition to sole internal
financing. It is also possible for it to go the other way around.
11. Why are financial statements used here?
Financial statements are used for external parties to look at the financial health of a
company because it is hard for the superior to monitor the subordinates.
10. What are the shortcomings of using accounting measures for tracking the firms financial
health?
The ratios on which this is determined can be computed in a variety of ways. Furthermore,
these measures are susceptible to creative accounting, or window dressing (like financial
statements).
An overall business objective
10. What is the overall business objective?
To meet the needs of debt and equity capital suppliers. External financial reporting addresses
this need.
11. What do external financial reports focus on?
The three main areas of cash flow, operating profit and asset value. Furthermore, it focusses
on the performance of the business entity and the return it provides to its shareholders.
12. Why are audited financial reports important?
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