ACCA Paper P5 (INT) Advanced Performance management - Pocket notes - Kaplan

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Non-financial performance indicators

Non-financial performance indicators Chapter 10

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Strategy mapping

Financialperspective

learningand

growthperspective

Determinehowthemainwayinwhichtheorganisationisgoingtocreatevalue

identifythenancialstrategieswhichwillsupportthis

Clarifythecustomer-orientedstrategieswhichwillsupportthe

overallstrategy

identifyhowtheinternalprocesseswillsupportthesestrategies

identifyoverridingobjectiveoftheorganisation

Customerperspective

internalperspective

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The performance pyramid (Lynch and Cross)

Defines the links between objectives and performance measures at different levels in the organisation.•

Designed to ensure that activities of every department, system and business unit support the •

overall organisational vision.

Tends to concentrate on two groups of stakeholders – shareholders and customers. Need to •

ensure that other stakeholders are also considered.

Corporate

vision

Market Financial

Customer

satisfaction

productivity

Flexibility

Quality

Delivery Cycletime Waste

Operations

business

units

business

operating

systems

Departments

andwork

centres

Measures/CsFsObjectives

Externaleffectiveness internalefciency

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Dimensions

Building blocks of performance

Six generic dimensions of

performance:

Whathasbeenachievedin

thepast?

• Competitiveness

• Financialperformance

howablearewetoachieve

resultsinthefuture?

• Qualityofservice

• Flexibility

• Resourceutilisation

• innovation

Three main concepts:

Ownership•

achievability•

Equity•

Three main concepts:

Clarity•

Motivation•

Controllability•

standards

Rewards

Exam focus

Recent exam question

December 2008 - Question 1a(iii)

Poorer candidates did not relate their

answer to the scenario and gave bullet point

answers for some parts of this question.

Fitzgerald’s and Moon’s building block

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identifykeyoutputsrequiredfromtheservice

Revieweffectivenessofthecontrolsystem

identifykeyprocessesinprovidingtheoutputs

identifytheinterfacesoftheserviceprovider

Developperformanceindicatorsforthekeyprocesses–basedondimensionsofperformance

identifydatasourcesformeasures

Developreportingsystem

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Non-financial performance indicators

ADVANTAGES

Easytocalculate•

providedquickly•

understoodbynon•

financialpeople

lesslikelytobe•

manipulated

DISADVANTAGES

Financialaspect•

cannotbeignored

possibleinformation•

overload

pursuitofoperational•

goalsmayblind

managerstooverall

strategy

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Non-financial performance indicators Chapter 10

Qualitative issues

Difcultiesin

measurementand

interpretation

Qualitative

information

Thehighcostof

collectingand

improvingqualitative

information

Evaluating

qualitative

informationis

subjective

Maybeincomplete.

Qualitativeaspects

areoften

interdependent

Conventionalsystems

arenotabletocarry

qualitative

information

informationinthe

formofopinionsis

difculttomeasure

andinterpret.

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Predicting corporate failure

Reasons for corporate failure

Strategic drift

Theslow,incremental

emergenceofstrategywhen

radicalchangedemanded

byenvironment

Failure to adapt

(tochangesinthe

environment)

Failure of large

project

Corporate failure

Companyunable

toachieve

satisfactory

returnoverthe

long-term

Inability to raise

sufcient funds

Poor management

Marketing•

Quality•

acquisitions•

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Assessing the risk of failure

There are a number of ways of assessing

the likelihood of failure.

Analysis of the company accounts to •

identify problems relating to key ratios.

Other information in the published •

accounts.

Information in the chairman’s report and •

the directors’ report.

Information in the press.•

Information about environmental or •

external matters.

Use of corporate failure prediction •

models.

Quantitative models e.g. – Z score

model. A ratio devised by Robert Altman

to describe the financial health of a

company, and its likelihood of financial

distress.

Qualitative models e.g. Argenti. –

Altmans Zscore

Z score = 1.2X1+ 1.4X2 + 3.3X3 + 0.6X4 +

1.0X5

Where:

X1 = working capital/total assets (liquidity)

X2 = retained earnings/total assets (gearing)

X3 = earnings before interest and tax/total

assets (productivity of assets)

X4 = market value of equity/total liabilities

(equity decline before insolvency)

X5 = sales/total assets (ability of assets to

generate revenue)

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Corporate failure prediction models.

Early indicators – Passive imbalanced board, weak FD or no budget control.•

Subsequent mistakes – High gearing , overtrading or failure of a big project.•

Immediate indicators – Bleak financial indicators, creative accounting or non financial signs •

such as high staff turnover.

Quantitative models Qualitative models

Features Incorporate trend analysis.•

Take account of variations by •

industry.

May use information technology and

systems such as expert systems.

Many models include a range of •

different variables:

macroeconomic –

the quality of management –

the growth phase –

the quality of the company’s –

assets.

Use is made of sets of rules based on

the attributes of failing firms.

Systems have been developed which

are capable of handling multiple

criteria.

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Limitations The score estimated is a snapshot.•

Further analysis is needed to fully •

understand.

Scores are only good predictors in •

the short term.

Results only as good as the •

information which is input to them.

Based on the subjective judgement •

of experts.

Some scoring systems tend to rate •

companies low – that is they are

likely to classify distressed firms as

actually failing.

Strategies to prevent corporate failure

Depends on spotting warning signs and taking quick corrective action.

Investigate and identify the causes.•

Seek external advice.•

Accept that there is a problem and move on to a solution.•

May involve major strategic change.•

Put in controls to prevent further loss.•

Have effective management systems in place to begin with!•

Read corporate failure article issued July 2008

ACCA Paper P5 (INT) Advanced Performance management - Pocket notes - Kaplan - 2010

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