P2 - 5. Performance and Budgets Flashcards by Lucy Bishop

What are the 3 categories of KPI?

Profitability
Asset Utilisation
Liquidity

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What is the equation for Return on Capital Employed?

PBIT / TALCL

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What does ROCE look at?

How effectively the assets of the business are being used to generate a return

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What is the equation for gross profit margin?

Gross Profit / Revenue

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What does gross profit margin look at?

What is the trend in underlying sales margins, and how well are you controlling production costs?

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What is the equation for operating profit margin?

PBIT / Revenue

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What does operating profit margin look at?

Are operating costs being kept under control, and are those operating costs fixed or variable?

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What is the equation for asset turnover?

Revenue/TALCL

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What does asset turnover look at?

How effectively are the assets of the business being used to generate revenue

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What is the alternative calculation for ROCE?

Operating Profit Margin x Asset Turnover

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What is the equation for the current ratio?

Current Assets / Current Liabilities

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What does the current ratio look at?

Can the business meet its obligations when they fall due?

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What is the equation for the quick ratio?

(Current Assets - Inventory) / Current Liabilities

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What does the quick ratio look at?

Can the business meet its obligations when they fall due, considering inventory is not easy to turn into cash quickly?

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What is benchmarking?

Identifying best practise for a particular task or function, through data gathering, and using this as a basis for setting targets and aiming for improvements and adoption of best practise

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What are the 4 types of benchmarking?

Internal
Functional
Competitive
Strategic

What is internal benchmarking?

One division is compared to another within the same organisation

What is functional/operational benchmarking?

Comparing an internal function with the best external performer, even if that is in another industry

What is competitive benchmarking?

Obtaining information on a direct competitor

What is the difficulty in competitive benchmarking?

They will not willingly share information - often need to buy products and examine then

What is strategic benchmarking?

A higher level of competitive benchmarking focusing on strategic decisions and changes happening within the competitors organisation

What are the 4 main benefits of benchmarking?

Setting tough but attainable performance levels
Forces business to look at competitive environment
Identify where process improvements are needed
Driver for change in a business

What is the benefit of using non financial performance indicators?

Helps to consider what underlies successful financial performance, and gives a better insight into probable long term success

What are 5 key examples of non financial performance indicators?

Staff turnover percentage
Number of new products launched to market
Customer satisfaction scores
Wastage measures
Quality control reject rate

What is the balanced scorecard?

An approach to performance management that emphasises the need to provide the user with a set of information that addresses all areas of performance, both financial and non financial

What are the 4 areas of the balanced scorecard?

1. Financial 2. Internal Business Processes 3. Customer 4. Innovation & Learning

What are 3 key examples of financial KPIs on the balanced scorecard?

1. ROCE 2. Net profit margin 3. EPS

What are 3 key examples of internal business process KPIs on the balanced scorecard?

1. Quality control reject rate 2. Turnaround time 3. Production set up time

What are 3 key examples of customer KPIs on the balanced scorecard?

1. Customer satisfaction score 2. % on time deliveries 3. Warranty claims %

What are 3 key examples of innovation and learning KPIs on the balanced scorecard?

1. Staff retention rate/turnover 2. Number of new products launched to market 3. % revenue from new products over the last period

What is the use of the balanced scorecard in budgeting?

Ensure that resources are allocated in an effective manner based on the 4 elements, with a long term focus on the underlying success factors

What are the 2 main problems of the balanced scorecard?

1. Danger of information overload | 2. Short term vs long term conflicts (e.g. R&D)

What is the process in top down budgeting? (3)

1. Overall target set by senior management 2. Principle budget factors set, and then operational budgets set 3. Reviewed by departments to see if achievable, can be challenged by senior management make the final call

What is the process in bottom up budgeting? (3)

1. Each department identifies what is achievable 2. Principle budget factor is set, and then operational budgets set 3. Senior management review, challenge, and make the final call

What are the 3 benefits of top down budgeting?

1. Considers overall company objectives 2. More time efficient 3. Senior staff can see 'big picture'

What are the 4 benefits of bottom up budgeting?

1. Greater involvement and buy in from budget holders 2. More motivational for staff 3. More likely to take ownership 4. Likely to be more realistic, take account of relevant information

What is the greatest risk with allowing bottom up budgeting?

May tempt incorporation of budgetary slack