Wk7boperations Financial Performance

Performance Measurement Chapter 14 pp 281-299 Case Studies: “Tex Rob” pp299-303 “When NICE isn’t good enough” pp15-18

Primary Reports Production and inventory planning and control are part of primary reports. These reports normally include the following:  Planned orders, a schedule indicating the amount and timing of future orders  Order releases, authorising the execution of planned orders  Changes to planned orders, including revisions of due dates or order quantities and cancellation of orders.

Secondary Reports Performance control, planning, and exceptions belong to secondary reports.  Performance-control reports evaluate system operation eg. deviations, missed deliveries, stock outs.  Planning reports forecast eg inventory requirements.  Exception reports show discrepancies eg late and overdue orders, scrap rates, errors.

Profitability Refer example p. 288 2. As a business “owner” would you be happy with the “return on shareholders funds” as shown?

Liquidity Refer example p. 287 2. Describe what is meant by “liquidity” and “solvency” using the data provided. 3. What is a “ratio” and why is it a useful measure in this case?

Extract Financial Performance Operational Performance Sales Direct costs Gross Contribution

20,000 (8,000) 12,000

Employee Costs Operating Costs Management Costs Admin costs Marketing & Advertising Financing costs

(2,200) (1,400) (400) (1,000) (1,000) (500)

Less Overheads

(6,500)

Surplus Before Tax Add interest EBIT

5,500 500 6,000

The Financial Position Fixed assets -------100

This is the Total Assets(Fixed+ Current) minus the Current Liabilities

Current Assets Debtors 35 Stock 15 --------------------------+ 50 Current Liabilities Creditors -------------------------- (40) TA - CL ----------Debt Equity

Management

110 40 70

Funding --------------- 110

Ownership

Financial Position & Financial Performance 0

1

BS FA +CA - CL External Debt and Equity

P&L

2

BS

P&L

P&L

3

BS

4

BS

KPI’s – Using Financial Indicators Return on Total Assets =

EBIT Total Assets

Return on Net Assets =

EBIT Net Assets

EBIT Sales

Profitability

X

Sales Net Assets

Asset Utilisation

Measuring the whole company

Measuring Management Performance

A few Key ratios Relevant to Operational Managers Profitability Ratios Direct Costs / sales Closing Inventory to sales Gross Margin Employee Costs/Sales % Marketing/Sales % Operations/Sales % Management / Sales % Administration /Sales % Occupancy /Sales % Financing /Sales % Depreciation/Sales % Profit (Surplus)/ Sales % EBIT/Sales Tax NOPAT/Sales %

Asset Utilisation (efficiency) Fixed Asset Utilisation Current Asset Utilisation Liquidity Ratios Trading Efficiency Breakdown of ROE Debt Ratios Gearing Ratios Debt gearing Income Gearing

Profitability Refer: “When NICE isn’t good enough” pp15-18 Assuming “capital expenditure” reads “general expenses”.  What has been happening to “profit”?  What are the reasons for changes, implied in the figures?  What can the owner do with the balance shown in the Profit & Loss extract?

A Typical Example Mar-87

Mar-88

Mar-89

Mar-90 AVG

15.0% 2.9% 5.08

16.9% 3.0% 5.58

21.6% 3.2% 6.77

17.83% 3.06% 5.81

54%

19%

34%

39%

22.0%

41.0%

72% 75.3% 14% 28.0%

71% 75.7% 16% 28.6%

72% 75.8% 16% 27.6%

71.93% 75.61% 15.26% 28.07%

25.8% 4.4% 21% 0.8% 1.97%

26.6% 4.2% 21% 1.0% 2.03%

25.6% 3.5% 21% 1.2% 2.14%

26.01% 4.06% 20.96% 0.99% 2.05%

Business Level Ratios: EBIT/Net Assets % (RONA) EBIT/Sales % Sales/Net Assets Income Growth Ratios

52%

EBIT Growth Cost of Sale Purchases / Sale % Closing Inventory / Sale % Gross margin Key Operating Ratios Total Overheads / Sales Management Costs / Sales Operations Costs/Sales Financing Costs / Sales NOPAT / Sales %

Note: This is a teaching example for operations management and should be treated with caution

Fixed Asset Utilisation : Sales / Fixed Assets

13.47

14.38 4%

17.16 2%

15.00 3%

3.63 10.1% 7.3%

3.58 11.0% 9.5%

3.47 11.8% 9.5%

3.49 10.96%

Increase In F Assets / Sale Current Asset Utilisation : Sales / Current Assets Debtors / Sales % Creditors/Sales % Rough Trading Efficiency Debtors days to Pay Creditors Days to Pay Liquidity Ratios : Current Assets / Current Liabilities Liquid Assets / Current Liabilities Working Capital / Sales %

37 38

40 50

43 50

39.99 46.06

1.8 0.9 12%

1.6 0.7 11% 27%

1.5 0.7 9% 14%

1.61 0.76 10.73% 20.4%

24% 26.0%

19% 32.8%

14% 38.4%

18.94% 32.39%

1.83

1.70

1.59

Inc in Inventory / Inc in Sales % Debt/Gearing Ratios : Total Debt / Book Value of Equity Income Gearing ( Interest / EBIT ) Corporate Ratios Total Assets /Total Liabilities

1.71

Note: This is a teaching example for operations management and should be treated with caution

Resource Utilisation Refer to text pp 289-290 What are the positive and negative aspects of budgetary control?

Evaluation of Tex Rob Refer to the case study: What is your general opinion of Tex Rob’s performance measurement? Back up your opinion through referencing the 4 key measurement areas.