What four perspectives are included in Balanced Scorecard?

Financial - ROI- Revenue Growth- Profitability

Customer - Increase Customers- Increase Satisfaction

Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects

Learning & Growth - Training- Personnel Development

Why was Balanced Scorecard created?

To measure Performance.

What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

What is a Strategic Initiative?

A plan to achieve goals.

What measures are used under Value-Based Management?

Return on Investment Residual Income Spread Economic Value Added Free Cash Flow

How is Return on Investment (ROI) calculated?

ROI = Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 = 60% ROI

How is Residual Income calculated?

Operating Income - (Required Rate of Return x Invested Capital) = Residual Income

What is another name for Required Rate of Return (RROR)?

RROR is also called ‘Cost of Capital’

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) = 10.65%

How is Spread calculated?

Spread = ROI - Cost of Capital

What is the primary point of Economic Value Added? How is it calculated?

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added = Operating Income After Tax - (Net Assets x WACC)

How is Free Cash Flow calculated?

Operating Income After Tax \+ Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital = Free Cash Flow

What is measured by Six Sigma?

It measures a product versus its quality goal.

What is the Asset Turnover Ratio?

Sales / Average Assets

What does the Current Ratio tell us? How is it calculated?

Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities

What does the Debt to Equity Ratio tell us? How is it calculated?

How is the company financing its capital?

Debt to Equity Ratio = Total Debt / Total Equity

What does the Debt to Total Assets ratio tell us? How is it calculated?

What proportions of the company’s assets are encumbered with debt?

Debt to Total Assets = Total Liabilities / Total Assets

What does Gross Margin % tell us? How is it calculated?

How profitable is the product after COGS?

Gross Margin = Gross Profit / Net Sales

What does Operating Profit Margin tell us? How is it calculated?

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin = Operating Profit / Net Sales

How is Times Interest Earned calculated and what does it mean?

Can the company make their interest payments?

Times Interest Earned = Earnings Before Tax & Interest / Interest Expense

What does Return on Assets tell us? How is it calculated?

What % return are the assets generating?

Return on Assets = Net Income (net of interest & taxes) / Average Total Assets

How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock

What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory

What is the Quick Ratio and how is it calculated?

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

What is Average Collection Period- and how is it calculated?

How many days does it take the company to collect payment on A/R?

Average Collection Period = Average AR / Average Sales Per Day

What is an Internal Failure?

Products have quality defects- but are caught BEFORE they leave the warehouse.

What is an External Failure?

Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

What is Appraisal Cost?

Quality control- testing & inspection costs.