Performance Metrics are high-level measures what you are doing; that is, they assess your overall performance in the areas you are measuring.
They are external in nature and are most closely tied to outputs, customer requirements, andbusiness needs for the process. The performance measurement system should cover the following areas at a minimum:
•CUSTOMERS
1.Performance against customer requirements2.Customer Satisfaction
•PERFORMANCE OF INTERNAL WORK PROCESSES
1.Cycle times
2.Product and service quality
3.Cost performance (could be productivity measures, inventory, etc.) \
•SUPPLIERS
1.Performance of suppliers against your requirements
•FINANCIAL
1.Profitability (could be at the company, product line, or individual level)2.Market share growth and other standard financial measures
•EMPLOYEE
1.Associate satisfaction
Ananaya & Company comprises of five divisions A, B, C, D and E and the present performance. metric is return on assets. However, the controller has suggested management to switch over to economic value added (EVA) as the criterion rather than return on assets. Compute and tabulate both return on assets and EVA on the basis of following information (Rs. lakhs) and comment on divisional performance.
Controller feels corporate finance rates on current assets and fixed assets should be 5%and 10% respectively.
Solution: Working Note:
Return on Assets = Profit / Total Assets * 100
Comments:
1. It appears from the above analysis that division A has performed the best among the five divisions.
2. Also, it can be clearly noticed that divisions C and D seem to be in trouble.
3.Division A has performed the best when seen in terms of return on assets and economic value added.
4. The reason why division A has performed the best is that it has the best working capital management that can be reflected in the total amount invested in current assets and which is the least among the five divisions.
5. The above reason holds true for the poor performance of divisions C and D as can be seen that they have a huge amount invested in current assets which does not indicate good signs about their operational efficiency.
6. A company which is into an expansion and overall growth mode primarily invests into fixed assets and this is also one of the major reasons why the performance of division A is the best amongst all.
7. Though division C has also invested a huge amount in fixed assets the advantage is offset due to the fact that it perhaps has a larger investment in current assets.
8. Division E is the second best both in terms of R.O.A. as well as E.V.A.
9. Though division E has the same amount invested in current assets as that of division D and perhaps a lesser amount invested in fixed assets its profitability is much better and hence it has delivered a better performance.
10. Division B is a better performer than divisions C and D in terms of R.O.A. as well asE.V.A. but the major problem with this division is that it has a terrible working capital management. Its current assets are the highest and this reflects that it has huge sums of money held up either in debtors or inventory or rather it is holding a large amount of cash which is not a good sign.
They are external in nature and are most closely tied to outputs, customer requirements, andbusiness needs for the process. The performance measurement system should cover the following areas at a minimum:
•CUSTOMERS
1.Performance against customer requirements2.Customer Satisfaction
•PERFORMANCE OF INTERNAL WORK PROCESSES
1.Cycle times
2.Product and service quality
3.Cost performance (could be productivity measures, inventory, etc.) \
•SUPPLIERS
1.Performance of suppliers against your requirements
•FINANCIAL
1.Profitability (could be at the company, product line, or individual level)2.Market share growth and other standard financial measures
•EMPLOYEE
1.Associate satisfaction
Ananaya & Company comprises of five divisions A, B, C, D and E and the present performance. metric is return on assets. However, the controller has suggested management to switch over to economic value added (EVA) as the criterion rather than return on assets. Compute and tabulate both return on assets and EVA on the basis of following information (Rs. lakhs) and comment on divisional performance.
Controller feels corporate finance rates on current assets and fixed assets should be 5%and 10% respectively.
Solution: Working Note:
Return on Assets = Profit / Total Assets * 100
A = 300/960*100 = 31.25%
B = 220/2000*100 = 11%
C = 100/1600*100 = 6.25%
D = 110/1200*100 = 9.17%
E = 180/1000*100 = 18%
Economic Value Added (EVA) = Profit – (W.A.C.C.* Capital Employed)In this case,EVA = Profit – (W.A.C.C. on Fixed Assets * Total Fixed Assets) + (W.A.C.C. on CurrentAssets * Total Current Assets)A = 300 – (0.10*800) + (0.05*160) = 212 lakhs
B = 220 – (0.10*400) + (0.05*1600) = 100 lakhs
C = 100 – (0.10*600) + (0.05*1000) = -10 lakhs
D = 110 – (0.10*400) + (0.05*800) = 30 lakhs
E = 180 – (0.10*200) + (0.05*800) = 120 lakhs
Summary:Comments:
1. It appears from the above analysis that division A has performed the best among the five divisions.
2. Also, it can be clearly noticed that divisions C and D seem to be in trouble.
3.Division A has performed the best when seen in terms of return on assets and economic value added.
4. The reason why division A has performed the best is that it has the best working capital management that can be reflected in the total amount invested in current assets and which is the least among the five divisions.
5. The above reason holds true for the poor performance of divisions C and D as can be seen that they have a huge amount invested in current assets which does not indicate good signs about their operational efficiency.
6. A company which is into an expansion and overall growth mode primarily invests into fixed assets and this is also one of the major reasons why the performance of division A is the best amongst all.
7. Though division C has also invested a huge amount in fixed assets the advantage is offset due to the fact that it perhaps has a larger investment in current assets.
8. Division E is the second best both in terms of R.O.A. as well as E.V.A.
9. Though division E has the same amount invested in current assets as that of division D and perhaps a lesser amount invested in fixed assets its profitability is much better and hence it has delivered a better performance.
10. Division B is a better performer than divisions C and D in terms of R.O.A. as well asE.V.A. but the major problem with this division is that it has a terrible working capital management. Its current assets are the highest and this reflects that it has huge sums of money held up either in debtors or inventory or rather it is holding a large amount of cash which is not a good sign.