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Performance measures
Fred Wenstøp
The four dimensions of
the Balanced Scorecard
Maximize
Long term value of the firm
Customer
objectives
Financial
objectives
Internal
business
process
objectives
Fred Wenstøp
Learning
and growth
objectives
2
Financial objectives
as a function of life cycle
Life cycle
Stage
Growth
Revenue
growth rate
Sales
growth rate
Sustain
ROE
ROTA
ROCE
Fred Wenstøp
Harvest
Operating
Cash flow
Reduction in
working capital
(liquidity)
requirements
3
Core Customer objectives
Market share
% of volume, customers, revenue; share of wallet, stomach
Customer acquisition
ratio of new customer revenue per sales call or solicitation
expence
Customer retention
rate at which ongoing relationship is maintained
Customer profitability
Can be based on activity based costing
Fred Wenstøp
4
The internal business process
value chain
Innovation
process
Identify market and
create product
Operations
process
Build and
deliver product
Fred Wenstøp
Postsale service
process
Service the
customer
5
Innovation process objectives
Basic and applied research
•
•
•
•
% sales from new products
new product introduction versus competitors
manufacturing process capabilities
time to develop next generation of products
Product development (and same for postsale service)
• Yields (fraction of compounds that pass to next stage)
• Processing time
• Manufacturing cycle effectiveness:
– MCE =Processing time/Throughput time
Throughput = Processing+Inspection+Movement+Storage
• Quality (waste, scrap, rework)
Fred Wenstøp
6
Learning and Growth Perspective
 Employee satisfaction
 Employee retention
Index based on survey
– Involvement with decisions
–
–
–
–
–
Recognition for good work
Access to necessary
information
Active encouragment to be
creative and use initiative
Support level from staff
functions
Overall satisfaction with
company
(to protect investment and
prevent loss of knowledge)
Key staff turnover (%)
 Employee productivity
Fred Wenstøp
value added per employee
or
value added / employee
compensation
7
Two perspectives on the balance sheet
 Traditional perspective
Assets
 Sources and uses of funds
Liabilities
Things
Amounts
owned by the owed by the
business
business
100
100
Fred Wenstøp
Assets
Liabilities
Where
money is
spent
Where
money is
obtained
100
100
8
Structure of the balance sheet
Assets
Fixed assets
Liabilities
Owners’ funds
(FA)
(OF)
Long-term loans
Current assets
(LTL)
(CA)
Current liabilities
(CL)
100
Fred Wenstøp
100
9
Current assets
 Short term assets that can
be converted to cash
quickly
inventories
accounts receivable (trade
debtors)
cash and cash equivalents
miscellaneous
Assets
Fixed assets
(FA)
Current
assets
• pre-payments to suppliers
(CA)
100
Fred Wenstøp
Liabilities
Owners’
funds (OF)
Long-term
loans (LTL)
Current
liabilities
(CL)
100
10
Fixed assets
Assets
 All long term assets
Fixed assets
Intangibles
• Goodwill, patents, licences
(FA)
Liabilities
Owners’
funds (OF)
Net fixed assets
•
•
•
•
•
Land and buildings
plant and equipment
transport
computers
office equipment
Current
assets
(CA)
Long term investments
• Shares in associated
companies
100
Fred Wenstøp
Long-term
loans (LTL)
Current
liabilities
(CL)
100
11
Current liabilities
 Short term liabilities to be
paid within one year
Fixed assets
(FA)
Account payable (creditors)
Short term loans
• Bank overdrafts
• Interst bearing short term
debts
Miscellaneous
•
•
•
•
Assets
Current
assets
(CA)
Accrued payments
interests
current tax
dividends due
100
Fred Wenstøp
Liabilities
Owners’
funds (OF)
Long-term
loans (LTL)
Current
liabilities
(CL)
100
12
Long-term loans
Assets
 All long-term loans
Fixed assets
more than one year
(FA)
Current
assets
(CA)
100
Fred Wenstøp
Liabilities
Owners’
funds (OF)
Long-term
loans (LTL)
Current
liabilities
(CL)
100
13
Owners’ funds
 All claims by the owners
on the business
Assets
Fixed assets
(FA)
Issued common stock
Capital reserves
• Surplus from sources other
than normal trading that
cannot be distributed
Revenue reserves
• Surplus from trading. Can
be distributed as
dividends, but not often
used for that
Fred Wenstøp
Current
assets
(CA)
100
Liabilities
Owners’
funds (OF)
Long-term
loans (LTL)
Current
liabilities
(CL)
100
14
Common terms
Assets
 Total assets
Fixed assets
TA = FA + CA
 Capital employed
(FA)
CE = FA + CA -CL
CE = OF + LTL
Current
assets
 Net Worth
NW = FA + CA - CL - LTL
NW = OF
(CA)
 Working capital (liquidity)
100
WC = CA - CL
Fred Wenstøp
Liabilities
Owners’
funds (OF)
Long-term
loans (LTL)
Current
liabilities
(CL)
100
15
Profit and loss account
Sales
Operating costs
112
100
PBIT Profit before interest and tax 12
less interest 2
PBT Profit before tax
10
less tax
3
PAT Profit after tax
7
less dividends 2
RE
Retained earnings
5
Fred Wenstøp
16
Return on investment
ROTA = PBIT/TA
Return on total assets
• Shows how well management uses all the assets in the business
to generate an operating surplus
ROE = PAT/OF
Return on equity
• Absolute return delivered to shareholders
• High ROE leads to a high share price
ROCE = PBIT/(OF + LTL)
Return on capital employed
Fred Wenstøp
17