PM Acca CH 13

ACCA.
PM by Khaled Shokry, ACCA, ESAA
CHAPTER 13
PERFORMANCE MEASUREMENT AND CONTROL
MEASURING FINANCIAL PERFORMANCE
Any financial ratios could be required by the examiner to assess the performance of
a company.
Profitability Ratios
GPM (Gross Profit Margin) = GP/Sales * 100 %

Operating Profit Margin = Opera ng profit / Sales *100 %
ROCE (Return on capital Employed) = Opera ng profit / Capital Employed * 100%
capital employed = total assets less current liabilities or total equity plus long-term debt
The ROCE can be analyzed as below:
ROCE= operating profit margin × asset turnover
Operating Profit Margin= Operating profit / sales
Asset Turnover= Sales / Capital Employed
Liquidity Ratios
Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Acid test) = (Current assets – Inventory) / Current Liabilities
Measuring Risk
Gearing = Debt / Equity * 100 % Or Debt / (Debt + Equity) *100%

A high level of gearing indicates that the company relies heavily on debt to finance its
long term needs. This increases the level of risk for the business.
Interest Cover = Operating profit / Finance cost

A decrease in the interest cover indicates that the company is facing an increased risk of
not being able to meet its finance payments as they fall due.
ACCA. PM by Khaled Shokry, ACCA, ESAA
Dividend Cover= Net Profit / Dividend

A decrease in the dividend cover indicates that the company is facing an increased risk
of not being able to make its dividend payments to shareholders.
NON-FINANCIAL PERFORMANCE MEASURES
Measuring financial performance tells us WHAT has happened in terms of company

performance. This is a limited view of company performance as it only looks at past
performance and does not provide any indication of whether or not the company
will continue to succeed in the future.
Non-financial performance indicators tell us HOW the company has achieved
current performance and WHY the company has been successful. By analysing
company performance in this way (in addition to financial performance), it gives us
a fuller understanding of the company’s prospects for the future.
Furthermore, by focusing only on financial performance, management may take a
very short term view of company success. For example, cost reduction measures
may be taken in order to improve measures of profitability in the current year.
However, these cost reduction measures may affect product quality and damage
company performance in the longer time. By including non-financial performance
measures such as customer satisfaction in our analysis, management should be
more likely to focus on longer term success.
THE BALANCED SCORECARD
The balanced scorecard forces managers to look at the business from four important
perspectives.
It links performance measures by requiring firms to address four basic questions:
1. Customer perspective. "How do customers see us?"
2. Internal perspective. "What must we excel at? "
3. Innovation & learning perspective. "Can we continue to improve and create

value?"
4. Financial perspective. "How do we look to shareholders?"
The justifications of the balanced scorecard over the traditional measures are that:
● accoun ng figures are easily manipulated and as such may be unreliable
● changes in the business and market environment do not show in the financial
results of a company until much later. Factors other than financial performance
must therefore be targeted.
Customer Perspective
How do customers perceive the firm?

 This focuses on the analysis of different types of customers, their degree of
satisfaction, and the processes used to deliver products and services to
customers.
 Particular areas of focus would include:
- Customer service.
- New products.
- New markets.
- Customer retention.
- Customer satisfaction.
Internal Business Perspective
 How well the business is performing.
 Whether the products and services offered meet customer expectations.
 Activities in which the firm excels.
 And in what must it excel in the future?
 Quality performance.
 Motivated workforce.
Innovation and Learning perspective
 Can we continue to improve and create value?
 In which areas must the organisation improve?
 Product diversification.
 % sales from new products.
 Amount of training.
 Number of employee suggestions.
 Extent of employee empowerment.
Financial Perspective
This is concerned with the shareholders’ view of performance.

Shareholders are concerned with many aspects of financial performance.
Amongst the measures of success are:
 Market share.
 Profit ratio.
 Return on investment.
 Economic value added.
 Return on capital employed.
 Cash flow.
 Share price.
THE BUILDING BLOCK MODEL
This model is particularly suited to service industries.

Fitzgerald and Moon divide performance measurement into three areas:
1. Dimensions
2. Standards
3. Rewards.
Dimensions
This refers to how performance will be measured. The areas are:
 Financial (Profit)
 Competitive performance
 Quality of service
 Flexibility
 Resource Utilisation
 Innovation.
Standards
This refers to the targets that are set within the organisation. These should be:
 High enough to motivate.
 Be owned by the employees (through participation in target-setting).
 Be seen to be equitable.
Rewards
This refers to what the organisation (and the employee) is trying to achieve.
 The organisation’s objectives should be clearly understood.
 Employees should be motivated to work towards these objectives.
 Employees should be able to control areas over which they will be held
responsible.

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ACCA.

PM by Khaled Shokry, ACCA, ESAA

GPM (Gross Profit Margin) = GP/Sales * 100 %

The ROCE can be analyzed as below:

ROCE= operating profit margin × asset turnover

Operating Profit Margin= Operating profit / sales

Asset Turnover= Sales / Capital Employed

Current Ratio = Current Assets / Current Liabilities

Quick Ratio (Acid test) = (Current assets – Inventory) / Current Liabilities

Gearing = Debt / Equity * 100 % Or Debt / (Debt + Equity) *100%

Interest Cover = Operating profit / Finance cost

Dividend Cover= Net Profit / Dividend

NON-FINANCIAL PERFORMANCE MEASURES

Measuring financial performance tells us WHAT has happened in terms of company

3. Innovation & learning perspective. "Can we continue to improve and create

How do customers perceive the firm?

This is concerned with the shareholders’ view of performance.

THE BUILDING BLOCK MODEL

This model is particularly suited to service industries.

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