Financial Measurement of Performance & Productivity

Transcription

1 Financial Measurement of Performance & Productivity Contents Reasons of established performance measurements Issues affecting used of measurements Financial measurement- management ratios Definition of productivity Definition of value added Productivity index for measurement Benchmarking Conclusion 1

2 Reasons Of Performance Measurement Management must ensure that resources that are obtained and used effectively and efficiently in accomplishment of the organization s objective Raise awareness about productivity and performances, it is a way of trying to direct and support the performance of employees and departments within an organization Establish control to restore productivity and performance Identify actions to improve performance Performance measures can be financial or non-financial 2

3 Issues Affecting The Use of Measurements Negative attitudes of employees to measurement Lack of commitment from top management Lack of incentives/compensation systems to encourage measurement Little awareness of the benefits of productivity Varying expectations regarding what constitute an acceptable level of service 3

4 Financial Measurements Management Ratios 4

5 Basic Structure of Statement of Financial Position 资 产 负 债 表 的 基 本 结 构 Fixed Assets 固 定 资 产 Shareholders Equity 股 东 权 益 Long Term Liabilities 长 期 债 务 Current Assets 流 动 资 产 Short Term Liabilities 短 期 债 务 5

6 How To Read A Financial Statement 如 何 细 阅 财 务 报 表 Income Statement (Profit & Loss) 损 益 表 ( 盈 利 及 亏 损 ) Presents the flow of activity and transactions over a specific period 呈 现 特 定 期 间 的 活 动 及 交 易 流 动 Revenue (Sales) - Expenses = Profit/(Loss) 收 益 ( 销 售 ) - 费 用 = 盈 利 /( 亏 损 ) 6

7 Statement of Financial Position Dec 资 产 负 债 表 于 2008 年 12 月 31 日 ($'000) Fixed Assets 固 定 资 产 $ $ Shareholders' Equity 股 东 权 益 $ $ Building 建 筑 Paid up capital 实 收 资 本 Equipments 器 材 Retained earning 留 存 盈 利 12 (2) Current Assets 流 动 资 产 Current Liabilities 流 动 负 债 Bank 银 行 3 1 Accounts Payable 应 付 账 款 Inventory 存 货 Other accrual 其 他 应 计 项 目 Accounts Receivable 应 收 账 款 Tax accrual 应 计 税 款 Non Current Liabilities 非 流 动 债 务 Long term Loan 长 期 贷 款 3 Total Assets 总 资 产 Total Liabilities 总 债 务

8 Income Statement for period XXX to XXX XXX 至 XXX 的 损 益 表 $'000 % $'000 % Sales 销 售 % % Cost of Sales 销 售 成 本 (96) -60.0% (87) -66.9% Gross profit 毛 利 % % Administrative expenses 行 政 费 用 (28) -17.5% (28) -21.5% Selling and distribution expenses 销 售 及 分 销 费 用 (18) -11.3% (15) -11.5% Operating Profit % - Interest income/expenses 利 息 收 入 / 开 支 (1) -0.6% (2) -1.5% Profit before tax 税 前 利 润 % (2) -1.5% Income Tax 所 得 税 (3) -1.9% - 0.0% Profit after tax 税 后 利 润 % (2) -1.5% 8

9 Cash Flow Statement 现 金 流 动 表 (For Financial year ended Dec ) ( 于 2008 年 12 月 31 日 财 政 年 度 ) $'000 Profit before tax 税 前 利 润 17 Non cash item -Depreciation 非 现 金 项 目 -- 折 旧 2 Operating cash flow before working capital 营 运 资 金 变 更 前 营 业 现 金 流 19 Change in work working capital: 营 运 资 金 调 整 : Change in receivable & inventory 应 收 账 款 及 存 货 变 更 (9) Change in payable & accrual 应 付 及 应 计 账 款 变 更 (1) Net cash generated from operation 营 业 活 动 所 得 净 现 金 值 9 Financing Activities 融 资 活 动 Payment of long term loan 支 付 长 期 贷 款 (3) Investing Activities 投 资 活 动 Increase in Fixed Assets 固 定 资 产 增 加 (4) Net increase in cash 现 金 值 净 增 加 2 9

10 Example of Management Ratios: 1 Return on Investment Return on Equity Return on Total Assets Return on Capital Employed 2 Operation Performance Margin to Sales % Sales to Fixed Assets Ratio Inventory Turnover 3 Corporate Liquidity Current Ratio Quick Ratio Average Receivable Collection Period Days Payable Outstanding 4 Financial Strength Debt to Equity Ratio 10

11 Performance Ratios Return on Investment Return on Equity: It measure the return to shareholders ROE = Profit After Tax/Shareholders fund = S$14/$92 = 15.2% (2008) 2007 =(2.6%) 11

12 Performance Ratios Return on Investment Return on Total Assets It measures how well management uses of total assets to generate operating income ROTA = Profit Before Tax/Total Assets = $17/125 = 13.6% (2008) 2007 = (1.8%) 12

13 Performance Ratios Return on Investments Return on Capital Employed: It reflects the return on shareholder s fund + long term debt ROCE = Net profit after tax/(equity +long term debt) = $14/(92+0) =15.2% 2007 = -2.5% Compare this rate with market borrowing rates. 13

14 Performance Ratios Operating Performance Margin to Sales % - This measure what is left after all the operating cost Margin to Sales % = Operating profit/sales = $$18/$160 = 11.3% (2008) 2007= 0% 14

15 Performance Ratios Operating Performance Sales to fixed Assets Ratio How much sales are being generated from the fixe assets Sales to fixed assets ratio = Sales/Fixed Assets = $160/88 = 1.8 times 2007=1.5 times This ratio also indicates productivity of fixed assets 15

16 Performance Ratio Operating Performance Inventory Turnover How many times inventory are being sold during the? Inventory Turnover Ratio = Cost of good Sold/Average inventory = $96/12 = 8.0 times 2007 =8.7 times = 45.6 days = 41.9 days (365 days/8) (365 days/8.7) 16

17 Performance Ratios Corporate Liquidity Current Ratio It measures whether a firm has enough resources to pay its debt over the 12 months. Current Ratio = Current Assets/Current Liabilities = $37/33 = 1.12 times 2007 =0.84 times 17

18 Performance Ratios Corporate Liquidity Quick Ratio Company s near cash assets to settle the current liabilities Quick Ratio = (current assets- inventory)/current liabilities = $23/33 = 0.70 times 2007 = 0.52 times 18

19 Performance Ratio Corporate Liquidity Average receivable collection period It provides the average days of collecting the receivable ARC = 365 days/(total credit sales/avg receivable) = 365/(160/17.5) = 39.9 days 2007 = 42.0 days 19

20 Performance Ratio Corporate Liquidity Days Payable Outstanding Days it takes to pay the trade creditors DPO= Accounts Payable/Cost of Sales X 365 days = 15/96 X 365 = 57 days 2007= 71 days 20

21 Financial Strength Ratio Financial Strength Debt to Equity Ratio It is a great test of financial strength of a company Debt to Equity Ratio = Total Debt/Equity = $33/92 = 35.8% 2007 = 43.5% The greater the debt, the greater the risk 21

22 Example of Management Ratios summary Industry Avg 1 Return on Investment Return on Equity 15.20% (2.6%) XX XX Return on Total Assets 13.60% (1.8%) XX XX Return on Capital Employed 15.20% (2.5%) XX XX Actions To Be Taken 2 Operation Performance Margin to Sales % 11.30% 0.0% XX XX Sales to Fixed Assets Ratio 1.8 times 1.5 times XX XX Inventory Turnover 45.6 days 41.9 days XX XX 3 Corporate Liquidity Current Ratio 1.12 times 0.84 times XX XX Quick Ratio 0.7 times 0.52 times XX XX Average Receivable Collection Period 39.9 days 42.0 days XX XX Days Payable Outstanding 57 days 71 days XX XX 4 Financial Strength Debt to Equity Ratio 35.80% 43.50% XX XX 22

23 Management Ratios Question 1 Give examples of different management ratios used in The following categories: 1. Return on Investments 2. Operating Performance 3. Corporate Liquidity 4. Financial Strength 23

24 Productivity 24

25 What is Productivity? General understood to be a yardstick, expressed in output vs input formulas, it is a measure of how Effectively and Efficiently used inputs such as labor, capital (equipment & space) to produce output such as products and services 25

26 What is Productivity? The practice of business management based on the productivity concept should be aim for effective /efficient procurement and utilization of various resources, and to distribute the gain fairly among the stakeholders 26

27 What is Value Added? Value added is commonly used as measurement of output. It represents the wealth created through the company s production process or provision of service. It is easy to calculate and an effective communication and motivation tool 27

28 What is Value Added? Definition from Spring Singapore: It is the difference between what the customers pays (sales price) and the business pays for material and other input cost Value added = Sales purchases and services equal to Value added = Profit after tax (for normal operation) + Labor cost + Depreciation +interest for loan + Tax 28

29 Value Added Flow Chart Purchases In House Process : To employees Material *Labor/management Cost *Owned Equipment/Building Sales Operating Profit *Loan Interest *Income Tax *Net Operating Profit Other Expenses : Equipment renewal : To Bank : To Government : To Shareholders Value added Example 1 $ Example 2 $ Sales Sales Purchases: Purchases: Material (4,000) Material (6,000) Other expenses (2,000) Other expenses (2,000) (6,000) (8,000) Own expenses Own expenses Labor/Mgt (1,000) Labor/Mgt (1,000) Depreciation (500) Depreciation (500) (1,500) (1,500) Loan interest (300) Loan interest (300) Tax (400) Tax (400) Net profit 1,800 Net profit (200) Example 1 Value Added = Sales - All purchases Example 2 = $ =$4000 Value Addeed = $10, =$2000 or Value added = Net profit + Labor/Mgt cost + Depreciation+Interest + income tax = $ =$

30 Statement of Value Added Sales Less bought in items cost of material, services, expenses Total Value added X X Y Value added distributed to: To pay employees' wages and benefits To pay capital providers: Profit for shareholders Interest to bank on loan To pay government income tax To provide replacement and expansion of assets -depreciation Total value added X X X X X Y Statement from Mr. Mah Bow Tan as the Chairman of the NPB in 1986 " There is a need for a total approach to productivity. The man, the machine, and the system are all important" 30

31 Value Added Exercise 1 Please calculate the value added of the example Company with the additional information: Depreciation: $2,000 Wages & Training: $10,000 31

32 What is Value Added? Operating profit after tax = $14,000 Depreciation = $2,000 Loan interest = $1,000 Wages + Training = $10,000 (to extract from A/Cs) Tax = $3,000 Value added = $14, = $30,000 32

33 Factors Affect Productivity 1. Sales & Technology: Develop of new products, market mix, sales force, quality 2. Capital: Utilization of equipment, machines, space, automation 3. Management system: production plan, work organization 4. Human factor: Managerial abilities, labor skill, education, labor relation 33

34 Purposes of Setting The Productivity Index To compare company s performance with the benchmarking, and company s own performance trend, help to indentify areas for improvement 34

35 Examples of Productivity Index 1 Employee Related Value Added Per Employee Labor Cost Competitiveness Sales Per Employee 2 Equipment Related Capital Productivity Sales to Fixed Assets Ratio (same as mgt ratio) 3 Cost and Profit Cost of Sales Ratio Selling & Adm Cost Ratio Profit to Value Added Ratio 35

36 Value Added Productivity Index Employee Related 1. Value added per employee (labor productivity) Value added/no of employee = $30,000/10 = $3, Labor Cost Competitiveness Value added/labor cost = $30,000/$10,000 = 3 times 3. Sales per employee Sales/No of employee = $160,000/10 = $16,000 36

37 Value Added Productivity Index Equipment Related 1. Capital Productivity (Equipment Efficiency Ratio) Value added/net fixed assets = $ 30,000/88,000 = Sales to Net Fixed Assets Ratio (In the performance ratio) Net Sales/Tangible Fixed Assets = $160K/88K =

38 Value Added Productivity Index 1. Cost of Sales Ratio Cost & Profit Cost of Sales/Net Sales = $96/160 = 60% 2. Selling and Adm Cost Ratio Selling and Adm Cost/Net Sales = $46/160 = 28.7% 3. Profit to Value Added Ratio Profit after tax & interest/value Added=$14K/30K = 46.6% 38

39 Efficiency, Effectiness Affect Productivity Situation A Situation B Output qty and qty sold S$ S$ Profit after tax & inertest 100, ,000 Loan interest 1,000 1,000 Tax 17,000 34,000 (rough calculation) Labor cost 20,000 50% efficiency 20, % efficiency Depreciation 5,000 50% idle time 5, % utilized Total Value Added 143, ,000 No of employee Net Book value of equipments 95,000 95,000 Labor productivity 143,000/10 260,000/10 14,300 26,000 Capital productivity 143,000/95, ,000/95, % 273% Profit to value added 100,000/143, ,000/260,000 70% 77% If the labor and machine is only utilized by 50%, just looking at own number is not adequate, must compare with industry or do further in house analysis 39

40 Non Financial Performance Measure Area Performance measure Service Quality Productions performance Marketing effectiveness Personnel Number of complaints Proportions of repeat bookings Customer waiting times On time deliveries Set up times Days' inventory on hand Output per employee Material scrap percentage Schedule adherence Number of rework Machine down times Trend in market share Sales volume growth No of customers handled by sales staff Staff turnover Day lost through absenteeism Day lost through sickness/accident Training time per employee 40

41 Benchmarking your company with the Industry Own Company Industry Item Last Year Current Year Last Year Current Year Labor Productivity labor Cost Competitiveness Capital Productivity Profit to Value Added Ratio Output per Labor XXX XXX XXX XXX XXX Notes: Any comparison of productivity between companies will be meaningless, unless the method of calculation is the same 41

42 What ratios or measurement factors to be used? In principal, management must identify the what are the key elements for his/her business success : * Financial strength * Customer satisfaction * Quality * Market share * Short term or long term goals 42

43 The benefits of benchmarking Identifying gaps in performance by comparing own performance with competitor s or industry average Putting the company s resources and performance into perspective Learning and applying best practices Minimising complacency and self-satisfaction with your own performance Encouraging continuo s improvement 43

44 Difficulties in benchmarking Benchmarking exercises can be costly and time consuming. Other organization may be unwilling to share information The business functions being benchmarked must be similar enough for meaningful comparison Need to be very specific for areas to benchmark To managers must be prepared to make changes after the benchmarking exercise 44

45 Possible Source of Benchmarking Yearbook of Statistics Singapore Trade Associations Spring Singapore Feedback from customers 45

46 Conclusion Once a company understands how to setting targets for performance,regularly reviewing progress against them, work together to enhance performance, the value of the company will be improved. All the stake holders will be benefited from the value enhancement. Current Position Measurement & Improvement Stakeholders 46

47 Selected Average and Ratios in the Manufacturing Sector Unit 2000 % Change 2005 % Change 2010 Manufacturing Output Per Worker $' % % Value Added Per Worker $' % % Value Added to Total Output % % % 21.0 Remuneration to Total Output % % % 6.6 Source: Economic Development Board

48 Thank You 48