Financial performance measures
12 important questions on Financial performance measures
What are the pros and cons of market measures
PROS
- the closest/direct measure of firm value (congruent)
- available and accurate
- less manipulable
- understandable
- cost efficient
CONS
- not available for private firms
- not controllable for employees
- do not reflect realized performance but expectations
- may not always perfectly reflect firm value
What are the pros and cons of accounting measures?
- ratio terms: ROI, ROA, ROE
- accounting profit measures: EVA, EBITDA, residual income
Disaggregated financial measures
- revenue and expenses
PRO
- more controllable
- can be measures on timely basis
- precises and objective
- understandable
- cost efficient
CONS
- can be imperfect bc of conservative accounting rules of immediate expenses and slow recognition of revenues
- ignores value that cannot be measured
- profit depends on choise of measurement methods
- focus on past: ignores risk and changes in risk
What are the DuPont equations?
ROE = Net income/Sales * Sales/Total Assets * Total Assets/Shareholders Equity
ROE = profit * asset turnover * financial leverage
- Higher grades + faster learning
- Never study anything twice
- 100% sure, 100% understanding
For my 1st exam I got a C. Then, I started looking for ways to learn better and I came across Study Smart. Since then I have scored a A+, A, A- and another A. I highly recommend it to everyone who wants to hear it. I am so happy with it!!
I was struggling to finish all my first-year subjects for 3 years. Then I discovered Study Smart, which helped me to finish all of them within 3 months.
Because of StudySmart, things are going well in many ways. Before, I always had study stress and no time for anything. Now I feel calm and confident (because of the program). I used to score a B, now I usually score an A or A+.
Hey Chris, I really want to thank you very much for developing the platform, I usually got around C for my exams, now I scored an A+, an A and a A- !!
Since using Study Smart, my average has increased significantly. I even completed a statistics course with a A+ while I'm bad at statistics. I took on extra courses this year, because of Study Smart. Thanks so much!
Ever since I started studying with StudySmart I passed all my exams !!! No more re-sits!! At first, I was happy with a pass and now I only get good grades. Many thanks!
I aced all the courses I studied with Study Smart. For law, I first scored a D, and now an A! I’m 100% sure that I’ll pass all the courses I study with Study Smart.
I always thought I studied well. My grades were fine. I could never have imagined that applying these study skills would have such a huge and direct impact on my grades, my speed and the pleasure I have in learning.
For the first time, I finally feel totally confident about the way I learn. I have the perfect overview and make great progress in terms of speed and the grades I get. Thanks, Chris!
I immediately started to enjoy learning again, and my grades soared. All of a sudden, everything went better. I highly recommend Study Smart to all students..
Being able to create my materials online made the process of studying so much smoother and quicker. I no longer have to spend a huge amount of my time on creating my summaries.
At first, my notes were a mess. Now I use Study Smart to take my notes in a perfectly structured way. It helps me to save a lot of time and do other things I enjoy.
Students that study with Study Smart get better grades. The system applies all the learning methods in such a way that both well-performing students and students who struggle perform much better.
Hi Chris, I would like to thank you very much. Last year I scored C on a course, and this year I got an A+ thanks to your method! Thank you very much!
The largest effect is that my child is more enthusiastic about school! Every parent wants their children to be happy at school, Study Smart made it happen.
In high school, I failed several exams, and that has really changed now. I actually needed this tool very much back then. Since I started studying with StudySmart, I haven't had any D's. My average score is now an A and those are results I would have never had in the past
With my old method, I passed only 3 out of 8 courses. Since I started taking my notes digitally in Study Smart, I have passed all my courses on the first try. For me, StudySmart takes away the stress of wondering if I will pass or not.
Thanks to StudySmart, I passed all my exams, and with better grades than before! On top of that, I have mastered a very good study method now, which I am confident will help me earn my degree.
What are pros and cons of return ratios?
Underinvestment: opting for leasing instead of purchasing to reduce the denominator
What other accounting measures are there?
capital invested = total asset - current liabilities
RI = what remains of the organization after it remunerates, pays andreturns financial resources consumed.
Total assets - current liabilites = assets employed or invested capital
Total assets - liabilities = Shareholders Equity
EVA = NOPATadjusted - WACC*Invested Capital(adjusted)
WACC = E/(E+D)*Re + (D/(E+D)*Rd)*(1-Tc)
NOPAT = operating revenue - costs of goods sold - operating expenses - depreciation - amortization
What adjustments are made to EVA?
Amortized vs expensed:
- R&D
- Marketing costs
- Restructuring costs
Amortization = capitalizing the value asset over time. The value of asset is reduced over time, the benefit of an asset realized over time and thus minimizing the underinvestment incentive
What is a responsibility center?
Financial control through
- assiging responsibility
- setting targets, measuring results, reporting variances
Types of centers:
- revenue
- expense or cost
- profit
- investment
What are revenue centers?
They are often responsible for costs which directly incur notably sales costs.
e.g. Sales agencies, salesmanagers, fundraising
Decisions: sale elements
What are cost centers?
e.g. HR department, IT service
Decisions: managers often choose quantity or/and quality of inputs used in a cost center
Perf. Measures: total cost for a fixed output/average production cost/ output for a fixed budget
TWO TYPES
1. Standard:
- relation between input and output isknown and both are easy to measure
- evaluation: comparison of standard costs and actual costs = variance analysis
2. Discretionary
- output is difficult to measure in monetary terms and relation with inputs is unknown or uncertain (universities, R&D, etc)
- evaluation: is very subjective
What are profit centers?
Measurement: actual profits, net or compared to budget
2 versions
1. Sales focused: chared standard costs of products sold
2. Cost focused: are assigned revenues based on simple function of costs
KEY CHALLENGES
1. How to set appropriate transfer prices between organization
2. How to allocate corporate overhead to centers
3. Profit centers can be egoistic and affect rest organization
FIX
A) incentives only if it benefits whole org
B) use non financial perf measures for evaluation
What are investment centers?
Measured: ROI, ROCE (cap employed), RI, EVA
Lots of decision rights. They ratify and monitor decisions of cost and profit centers. Decide about the amount of capital invested or disposed and where to invest
Why responsibility centers?
2) managers should be held accountable for what they can control
+: keeping individuals motivated, if they cannot affect the results, they lose their motivation.
-: no incentives to take action that can reduce the effects of uncontrollable events. No incentive to sign up for insurance or hedge risks. Not being responsible for overhead costs does not motivate managers to reduce them
The question on the page originate from the summary of the following study material:
- A unique study and practice tool
- Never study anything twice again
- Get the grades you hope for
- 100% sure, 100% understanding
