...FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS By Evanti Firstadea (105020307121003) Rosyida Mardyana (105020307121011) University of Brawijaya Economics and Business Faculty Accounting Major FINANCIAL PERFORMANCE MEASURES AND THEIR EFFECTS INTRODUCTION The primary objective of for-profit organizations is to maximize shareholder (or owner) value, or firm value for short. Thus, the results-control ideal would be to reward each individual employee for doing what s/he does to increase firm value. However, because direct measurements of the individuals’ contributions to value creation are rarely possible, firms have to look for measurement and control alternatives. A commonly cited management axiom is: what you measure is what you get. This axiom works in practice because performance measures are linked to any of a number of incentives that employees value. Employees respond to these incentives. The measures, then, play valuable motivational, or decision influencing, roles. But what performance measure (or measures) should be used? At managerial levels of organizations, both at the corporate and entity levels, job responsibilities are both broad and varied. In common jargon, managers are said to be multitasking. Reflecting that task variety, the list of measures used in practice to motivate and evaluate managers’ performances is long. However, these measures can be classified into three broad categories. Two of these categories include summary, single-number,...
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...unique performance measures The Accounting Review, 75 (3), 283-389. (on CMD) Overview: Lectures 6 & 7 explore the use of Kaplan and Norton’s Balanced Scorecard (BSC) as a strategic performance measurement and evaluation method. Lecture 6 introduces the BSC by providing the performance measurement context, defining financial and non-financial and lead and lag indicators, and providing an overview of the four perspectives of Kaplan and Norton’s Balanced Scorecard. Lecture 7 explores and demonstrates the process of BSC development via strategy maps and KPI selection, before discussing the key findings of BSC-related research. Lectures 6 & 7 are structured as follows: Lecture 6: 1. Introduction 2. What is the BSC? 3. The four perspectives Lecture 7: 4. Strategy maps 5. Creating a BSC 6. What does the research say? 1. Introduction a) Performance Measurement Performance measurement serves the following purposes: Evaluate performance, and provide rewards Communicate the strategy, plans Allow managers to track their own performance against targets and take corrective action Guide senior managers in developing future strategies and operations. Traditional Performance measurement focuses on financial performance measures. The problems with this include: Financial measures emphasise only one perspective of performance. Conventional financial performance measures focus...
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...How can the financial performance of privately owned business be monitored? What are the main ways of monitoring to ensure the sound financial performance of an organization? Make use of examples to illustrate your arguments and answers. Name: XIE Yang (Jasmine) Tutor’s name: Diane Marsh Date: 16/09/2013 Word count: 1403 Introduction A primary responsibility of any business is to understand the financial situation. With this understanding, the company can run accordingly with management. Shen Yuchu (2005) illustrates that it is significant for the privately-owned firms to understand whether profit status influences performance. “Financial performance is measured by the entity’s ability to generate profit after tax, the accumulated change in retained profits and the entity’s ability to generate positive operating cash flows. These metrics were selected as they are standard techniques employed in the private sector when evaluating the performance of firms” (Aulich. C & Hughes. M, 2013). Financial performance with different ownership may be overseen in different aspects, so privately owned companies should be monitored from a specific perspective. This paper will examine the sound measures to monitor the financial performance in privately owned business. Firstly, some financial measures will be introduced to monitor the performance from the privately-owned nonprofit entities, presenting by a health center in the USA. Next to this, Melbourne...
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...Performance measurement (balance score card, financial measures, non-financial measures, divisional versus corporate) ABSTRACT This study aims at understanding the process of elaborating and selecting performance measures in the framework of the balanced scorecard (BSC). Previous studies in the now well-investigated effect that decision makers tend to give a much higher weight to common measures compared to unique measures (Banker et al, 2004; Lipe and Salterio, 2000) did not explore differences between perspectives in terms of commonality of measures used for performance evaluation purposes. We will explain why there are common measures in all perspectives and which their shared characteristics are. Based on a simulation with graduate students, we argue that common measures are found in every BSC’s perspective but with a significant degree of difference. Financial measures are by far the most common ones, internal process measures are the least common ones with customer and learning ranging somewhere in between. Our study implies that the idea of standardization beyond financial measures is based on three performance measures characteristics: 1) reliance on data already available, 2) easy benchmarking, and 3) possibility of being audited by third parties. We advanced implications for managers and for future research on the information generated in the BSC. 1. INTRODUCTION. This paper has been motivated by the evidence of some limitations of the balanced scorecard...
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...com/business-school-cases/citibank-performance-evaluation-case-analysis/ Citibank: Performance Evaluation Case Analysis November 21, 2010 James McGaran’s Performance Evaluation. Doing the year-end performance evaluation for James McGaran, the branch manager of the flagship office in the Los Angeles area, was probably one of the most difficult experiences in all my years with Citibank in the capacity of area manager. James has been not just an exemplary employee in our area, but really someone who other branch managers could always look up to. His career with Citibank has been a quick progression through the ranks from the assistant branch manager to the manager position at the most important of all the bank branches in the Los Angeles area – the Financial District office. Until this year his performance exceeded expectations in every single year. His financial results have been truly impressive. However with the introduction of the new performance scorecard which reflected the company’s broadening of the evaluation scope to customer satisfaction score, it became obvious that this was essentially the only area where James’ performance was lacking. At the same time Frits Seegers, President of Citibank California, was convinced that customer satisfaction indicator was important not only for meeting ever-increasing expectations of highly-sophisticated clients, but also for achieving strategic goals of the division, and staying competitive. Since five of the six performance measures in James’ year-end...
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...POLE PLC. FROM: A FINANCIAL CONSULTANT, SANTA DIVISION TOPIC: EVALUATION OF A NEW EXPANSION PLAN AND DIVISIONAL PERFORMANCE EVALUATION DATE: 12TH NOVEMBER 2012 INTRODUCTION: The purpose of this report is to critically address the expansion plan of Santa division management focused on the anticipated plant replacement. This action is aimed at improvement of the Santa division manufacturing capacity which is required for meeting demands of a new customer offering an attractive five years contract. In spite of the considered plan of expansion is perceived as a low-risk venture, the report will review the impact of accepting the contract using the given information and basing on financial (Return on capital employed (ROCE), Residual Income (RI)) and non financial performance measurement techniques, specifically the balanced scorecard approach. The following data is available for Santa division: Net profit before tax (PBIT) £ 3 mln per annum Net capital employed £ 10 million Required rate of return 20 % before tax The Following data is available on the anticipated contract: Contract duration 5 years Sales provided £ 2 mln per annum Operating costs on the contract £ 1,35 mln per annum, excluding depreciation The following data is available on the plant required: Plant replacement = annual depreciation per year Required capital outlay £ 2 mln (£ 1,5 mln of new fixed assets + £ 0,5 mln) Plant life 5 years FINANCIAL PERFORMANCE MEASURES (ROCE, RI): ROCE...
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...unique relative to the products or services of its competitors Leads to brand loyalty and the willingness of customers to pay high prices 2. Cost leadership—an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control Leads to lower selling prices 4 Financial Performance Measures Financial performance measures are traditional measures based on financial statements Examples of financial performance measures? Core financial measures Net income Return on assets (ROA) Return on (common) equity (ROE) Sales revenue Sales growth Total costs Cost reduction rate 5 Financial Performance Measures Financial measures reflect outcomes of past actions and do not necessarily predict future outcome well Financial measures are lag indicators Exclusively relying on financial measures can make managers to focus on short-term profitability and sacrifice long-term growth, e.g., Companies can save on R&D, process improvement, information technology and employee training to improve current financial performance at the expense of...
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...Introduction Aim Currently, the compensation structure is based on divisional contribution numbers. This Compensation Report aims to analyse the potential problems within the existing compensation structure and recommend alternative compensation structures that Changing Motors can adopt. Rationale As Changing Motors embark on their expansion plans in the future, there is a greater need to improve overall efficiency. Employees’ efficiency stems from the effectiveness of compensation structure. It is critical for Top Management to constantly review and adjust existing compensation structure to detect and correct any ineffective performance measures. All these measures should, in turn, support the strategic objectives. An effective Management Control System should include effective performance measures and evaluation, which will also link to rewards or disincentives. Ideally, the compensation structure should promote goal congruence and employees motivation and exclude elements of uncontrollability. Potential Problems with Existing Compensation Structure Although the current divisional contribution margin compensation structure enables controllability and motivates each division to work hard, it lacks goal congruence throughout the company. When managers are compensated solely based on divisional contribution numbers, divisional managers only focuses on divisional profits so as to gain their bonuses. On the other hand, Changing Motors’ main company goal is to not only be...
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...income statement. Question2: What additional data would be useful in analyzing the firm's January performance? Why? Answer: In budgeted income statement, Operating variance such as direct labor, direct material, variable factory overhead, fixed factory overhead-spending, fixed factory overhead-volume were not given according to monthly. If there are revenue variance, selling price variance, mix and volume variance, mix variance, volume variance, other revenue analysis, market share variance, industry volume variance, expense variance in the analysis statement given then it would be useful data for analyzing the firm's January performance because these data can inform us the difference between the revenue and expenses. Balanced Scorecard Basics The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. While the phrase...
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...Abstract To study the Citibank Performance evaluation case and evaluate James McGaran’s performance assuming the role of Lisa Johnson. Describe the approach taken in performance feedback session, sequence of conversation and supporting references to backup your evaluation. To Review the Citibank evaluation system as a consultant and recommend possible procedural and processes changes to improve its performance evaluation system. Citibank performance evaluation system Until 1994 Citibank performance evaluation system was based on the quantitative measure (financial measures) not both quantitative and qualitative measures (MBA6220, 2011) due to the type of services offered by the bank. With the change in Citibank’s strategy in California it was essential to measure both the qualitative and quantitative measures and a new performance evaluation system was tested in 1995 to be introduced from the first quarter of 1996. The performance scorecard of the system was built around six different types of measures: financial, strategy implementation, customer satisfaction, control, people and standards (Davila, A & Simons, R, 1997). Financial measures were computed from the regular accounting system, strategy implementation measures could be tracked based on the target customer segment relevant to branch strategy and control measures were measured based on internal auditor’s evaluation on the branch’s internal control processes. People and standards – the non-quantifiable ratings were...
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...The Institute of Chartered Accountants in Australia GAAP-based financial reporting: measurement of business performance charteredaccountants.com.au Professor Stephen Taylor, The University of New South Wales, Sydney, Australia The Institute of Chartered Accountants in Australia The Institute of Chartered Accountants in Australia (the Institute) is the professional body representing Chartered Accountants in Australia. Our reach extends to more than 53,000 of today and tomorrow’s business leaders, representing some 43,000 Chartered Accountants and 10,000 of Australia’s best accounting graduates who are currently enrolled in our world-class post-graduate program. Our members work in diverse roles across commerce and industry, academia, government, and public practice throughout Australia and in 107 countries around the world. We aim to lead the profession by delivering visionary thought leadership projects, setting the benchmark for the highest ethical, professional and educational standards and enhancing and promoting the Chartered Accountant brand. We also represent the interests of members to government, industry, academia and the general public by actively engaging our membership and local and international bodies on public policy, government legislation and regulatory issues. The Institute can leverage advantages for its members as a founding member of the Global Accounting Alliance (GAA), an international accounting coalition formed by the world’s premier accounting...
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...and measuring business unit performance.1 The Scorecard, with four perspectives—financial, customer, internal business processes, and learning and growth—provided a balanced picture of current operating performance as well as the drivers of future performance (see Exhibit 1). Can Business Operate with a Balanced Scorecard? CO Some argue that managers cannot operate with multiple measurements of business-unit performance. While they recognize that aggregate financial measures (such as operating income, return on investment, and economic value added) are not perfect by themselves, they claim that financial measures at least are well understood and provide clear, unambiguous, and objective goals on which all organizational participants can focus. Such people feel that multiple measures—some financial and some non-financial—are confusing and lead to ambiguous, often conflicting, signals about what the organization values. PY We disagree. Imagine entering the cockpit of a jet airplane and observing that there is only a single instrument. How would you feel about flying on that plane after the following discussion with the pilot: Reprinted by permission of Harvard Business School Press. Adapted from The Balanced Scorecard by Robert S. Kaplan and David P. Norton. Copyright ©1996 by the President and Fellows of Harvard College; all rights reserved. CALIFORNIA MANAGEMENT REVIEW VOL. 39, NO. 1 FALL 1996 53 Measures Targets Initiatives ...
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...Case Analysis: Citibank: Performance Evaluation Elena Wellard MBA 620 - 02 Professor Peter Frischmann November 23, 2008 1. Why has Citibank introduced a Performance Scorecard? The implemented performance scorecard specifies goals and measures manager’s performance in 6 areas: Financial measures Strategy implementation Customer satisfaction Control measures People Standards The primary purpose of the balanced scorecard is to set goals and allow managers to complete well-rounded performance reviews using both quantitative and qualitative measures. While financial measures are important in analyzing performance of the bank, they do not provide any insight into non-quantifiable measures that can be equally important in performance assessment. In addition, the balanced scorecard forces employees to adopt a broader view of the business and concentrate not only on financial measures, but on measures that are truly important to the success of the company. In the service industry, customer satisfaction is a particularly important measure in determining how the company is doing. A high level of customer service is a significant component of Citibank’s strategy in California. Frit Seegers sees it as a leading indicator of future financial performance of the bank. From the past experiences, it was determined that customer satisfaction ratings do not follow the same pattern as financial performance, and it is necessary to measure customer satisfaction separately. ...
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...organizational performance. While financial measures are important in analyzing performance, they do not provide any insight into non-quantifiable measures that can be equally important in performance assessment. According to Jerold Zimmerman (2014), “The balanced scorecard is designed to identify Key Performance Indicators used to focus employees towards those actions required to implement the firm’s strategy.” In other words, the purpose of the performance scorecard is to highlight the importance of a diverse set of measures in achieving the strategic goals. Citibank's strategy in California was to build a profitable franchise by providing relationship banking combined with a high level of service to its customers. Specifically, from Frits Seeger’s point of view, the high service quality strategy and other dimensions were critical to the long-term success of the franchises. As Jerold Zimmerman (2014) writes, “The ultimate objective of for profit organizations is to generate value for the owners…value for owners results from satisfying customers, operating efficiently, and having the infrastructure necessary to accomplish all those activities.” 2. Objective performance measures are those which are directly quantifiable and are not subject to the beliefs and interpretations of the observer. According to Robert Simons’ Performance Measurement & Control Systems for Implementing Strategy, “an objective measure can be independently measured and verified.” Subjective measures on...
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...1. Describe the performance management and appraisal system adopted by Citibank. Ans. In today’s economy more and more organizations are focusing their attention on enhancing performance and increasing profitability. To accomplish these goals, they need to ensure their employees focus their attention on behaviours that drive organizational success. Citibank also implemented a structured performance management and appraisal system in order to provide a mechanism for ongoing feedback and development. The Citibank followed a performance scorecard every year to find out the progress of each of their employee in order to assess his or her performance. The implemented performance scorecard specifies goals and measures manager’s performance in 6 areas: * Financial measures * Strategy implementation * Customer satisfaction * Control measures * People * Standards The primary purpose of the balanced scorecard is to set goals and allow managers to complete well-rounded performance reviews using both quantitative and qualitative measures. While financial measures are important in analyzing performance of the bank, they do not provide any insight into non-quantifiable measures that can be equally important in performance assessment. In addition, the balanced scorecard forces employees to adopt a broader view of the business and concentrate not only on financial measures, but on measures that are truly important to the success of the company. In the service industry...
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