performance assessment evaluating strategy- “ show me the money”
TRANSCRIPT
Performance
Assessment
Evaluating Strategy-
“SHOW ME
THE
MONEY”
Planning & Evaluating Your Strategy
Functional Planning:Functional Planning:Marketing Production
R&D, HRFinance
Market Research:Market Research:Situation & SWOTSituation & SWOT
AnalysisAnalysis
Corp. & SBUCorp. & SBUStrategyStrategy::
Mission & VisionGrowth &
Competitive Strategy
PerformancePerformanceAssessment:Assessment:
Success Measures& Financial Ratios
Let’s Examine:
1.Ways to plan & evaluate your financial performance
2.Some Financial Planning guidelines
Financial Proformas & Reports
BalanceBalanceSheetSheet
Financial Financial RatiosRatios
CashCashFlowFlow IncomeIncome
StatementStatement
Shows cash movement in & out of organization
& how much cash is available
Shows cash movement in & out of organization
& how much cash is available
Compares revenues & expenses for the period
Indicates profitability
Compares revenues & expenses for the period
Indicates profitability
http://www.fool.com/school/valuation/howtoreadabalancesheet.htm
What Co. Owns
What Co. Owns
What Co. Owes
What Co. Owes
Who Owns Co.
Who Owns Co.
Provide insights into company’s operations & strategy
Used internally to evaluate performance & set goals
Used externally to make investment decisions
Provide insights into company’s operations & strategy
Used internally to evaluate performance & set goals
Used externally to make investment decisions
Financial Ratios
ROE
ROA
ROS
Asset T/O
P:E
Financial Ratios Answer 5 key
Questions
1) How liquid is your firm?2) How profitable is your Firm?3) How effectively are you utilizing
your assets ?4) How are you financing your assets?5) Are you providing your owners an
adequate return on their investment ?
Your Company’s ratios
as reported annually
in the
Capstone Courier
Financial Guidelines Re: Liquidity
You’ll be left w/less revenue than
anticipated PLUS production &
inventory carrying costs that must be
paid..
IF You Produce a crappy product &/or Your Competitors produce a
better product &/or You produce too much product
Then
You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs....
IF
Then
Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment
•Maintain Adequate working
capital & cash reserves
In order to:
In order to:
•Have realistic/ accurate
sales forecasts
•Avoid a Liquidity Crisis- & “Big AL”
Need to:Need to:
1
2
3
4
Basic Steps of Sales Basic Steps of Sales ForecastingForecasting
BEST CASEBEST CASE
WORST CASEWORST CASE
Your Product/Total Customer survey scores = DemandYour Product/Total Customer survey scores = Demand
•Enter WORSE case- in “your sales forecast” on marketing spreadsheet
•Enter BEST case- in “production schedule” on production spreadsheet
•Spread show up as inventory on proforma BALANCE SHEET
$0.00
In WORSE CASE: You should observe lots of Inventory
& little or no Cash.
In WORSE CASE: You should observe lots of Inventory
& little or no Cash.
Return to Marketing Spreadsheet.
Enter your best case forecast.
Observe that your Balance Sheet will now reflect:
lots of Cash and no Inventory 000
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid …
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid …
$0.00
In WORSE CASE: You will have lots of Inventory
& thus need to drive your cash position to the black…
In WORSE CASE: You will have lots of Inventory
& thus need to drive your cash position to the black…
Liquidity Guidelines
To adjust your cash position -- If you are cash poor,
issue Stock /Bonds ; or if necessary consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
To adjust your cash position -- If you are cash poor,
issue Stock /Bonds ; or if necessary consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
For example, 1. If your annual sales
were $120M, in one month you’d sell $10M.
2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
3. This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.
Financial Ratios 2nd Key Question
1) How liquid is your firm?2) How profitable is your Firm?3) How effectively are you utilizing
your assets ?4) How are you financing your assets?5) Are you providing your owners an
adequate return on their investment ?
Profitability Ratios
Show how profitable company is
ROS---Return on SalesROA—Return on AssetsROE-- Return on Equity
““ROS indicates the percentage of each ROS indicates the percentage of each sales dollar that results in net income.”sales dollar that results in net income.”
Main ratio of ProfitabilityReturn on Sales
Return on Sales =Return on Sales = net profitnet profit
net salesnet sales
net profitnet profit
net salesnet sales
Financial Guidelines:
Profitability
2) How Profitable is your Firm?
Gross Margin
Gross Profit (Sales – COS) / Total Revenue
Gross Margin
Gross Profit (Sales – COS) / Total Revenue
Benchmark = 30%.... If less need to: Reduce costs
&/or raise prices
Benchmark = 30%.... If less need to: Reduce costs
&/or raise prices
Financial Ratios 3rd Key Question
1) How liquid is your firm?2) How profitable is your Firm?3) How effectively are you utilizing
your assets ?4) How are you financing your assets?5) Are you providing your owners an
adequate return on their investment ?
Main Ratio-Asset Turnover
Reveals how effective assets are at generating sales revenue.
The higher the better= more efficient use of assets
Asset Turnover =sales
assets
sales
assets
$103,777/ $96,043 = 1.08
Firm can generate $1.08 in sales for every $1 assets
Return on Assets
Return on Assets = =net profit
assets
net profit
assets
““ROA measures company’s ability to use all its assets to generate earnings.”
Financial Guideline:
Assets
Maintain Adequate Assets
Quick n’ Dirty Guestimate-
Assets/Current Sales -- Ratio
Have $108 in assets/ & sales of $186= 58%
Thus if project sales of $300k Will need ~$174k in assets Thus need to add/raise an additional
$66K….
Financial Ratios 4th Key Question
1) How liquid is your firm?2) How profitable is your Firm?3) How effectively are you utilizing
your assets ?4) How are you financing your assets?5) Are you providing your owners an
adequate return on their investment ?
COMPANY BALANCE SHEET
ASSETSCash
Accts Receivable
Inventory
TOTAL CURR ASSETS
Land/Bldg.
Plant/Equip.
TOTAL FIXED ASSETS
TOTAL ASSETS
LIABILITIESAccts payable
Accrued Expenses
Short Term Debt
TOTAL CURR LIAB
Long Term Debt
TOTAL LIABILITIES
NET WORTH
Common Stock
Retained Earnings
NET WORTH
TOTAL LIABILITIES
AND NET WORTH
11%11%
16%16%8%8%
35%35%
30%30%35%35%65%65%
100%100%
20%20%10%10% 8%8%
38%38%
13%13%
51%51%
12%12%
37%37%
49%49%
100%100%• Assets/Equity = owner's• Debt/Assets = lenders• Debt/Equity = management
• Assets/Equity = owner's• Debt/Assets = lenders• Debt/Equity = management
Leverage Perspectives
Assets/Equity – simulation takes owner's perspective.
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity
Leverage Assets Debt Equity
1.0 $1 $0 $1
2.0 $2 $1 $1
3.0 $3 $2 $1
4.0 $4 $3 $1
LEVERAGE:
1.8 to 2.8
OptimalOptimal
Corp assets fin.w/ debt
AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default
AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default
•As your debt-to-assets ratio increases…
•Your short term interest rate increases…
•For each additional .5% increase in interest
•You drop one category
Leverage from lenders’ perspective impacts bond ratings:
Last Key Question
Are you providing your owners an adequate return on their investment
Owners evaluate profits (not the wealth) w/ two stat’s:
ROE (Return On Equity) ROE = Profits/Equity = Profits/Assets *
Assets/Equity = ROA * Leverage.
EPS (Earnings Per Share) EPS = Profits/Shares Outstanding
STOCK PRICE Function of:
1.Book Value Equity/ # shares
issued2.Earnings per
Share Net Profit/ Shares
3.Dividend Policy
Encompasses the 3 main levers used
by mgt to generate return on investors
equity
Profitability * Asset Mgt * Leverage
ROE
DuPont Formula
Return on Equity =Return on Equity =net profitnet profit
equityequity
net profitnet profit
salessales
salessales
assetsassets
assetsassets
equityequityxxxx xxxx
Profitability * Asset Mgt * Leverage
Return on Equity =
net profitnet profit
equityequity
Improve ROE by:Improve ROE by:
1) Increase sales w/out increase costs & expenses
2) Reduce COG or operating expenses
3) Increase sales relative to asset base- either by increasing sales or by reducing company assets
4) Increase use of debt relative to equity-- but only to extent it does not jeopardize firm’s financial position
Improve ROE by:Improve ROE by:
1) Increase sales w/out increase costs & expenses
2) Reduce COG or operating expenses
3) Increase sales relative to asset base- either by increasing sales or by reducing company assets
4) Increase use of debt relative to equity-- but only to extent it does not jeopardize firm’s financial position
Success Measures
Cumulative Profits Ending Market Share ROS Asset Turnovers ROA ROE Ending Stock Price Market Capitalization (Ave # Shares) * (Closing
Price)
Diff Strategies Play into Different Success Measures
Profit MS SP & MC
ROEpf/e
ROSpf/s
ATs/a
ROApf/a
BCL X X X X
Cost- Niche & PLC
X X X
B-Diff X X X X
Niche-Diff
X X X X
PLC-Diff
X X X X
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Cost Strategy = higher leverage/more
investment/ more assets/more debt/ le
ss
equity
Differentiation Strategy =lower
leverage/less investment/ less assets
Differentiation Strategy =lower
leverage/less investment/ less assets All Segments= more sales & thus enable
greater Cum. profit & overall market share
All Segments= more sales & thus enable greater Cum. profit & overall market share
Focused
Strategies should
operate more
effectively
Focused
Strategies should
operate more
effectively
• Select your Success Measures & Determine Relative Weightings
• Enter weightings – in preparation for simulation: Practice Round #1
• Select your Success Measures & Determine Relative Weightings
• Enter weightings – in preparation for simulation: Practice Round #1
The Balanced ScorecardThe Balanced Scorecard
1992 1996 2000
Balanced Scorecard History
Measurement and
Reporting
Alignment and Communication
Enterprise-wide Strategic
Management
Article in Harvard Business Review:
“The Balanced Scorecard — Measures that Drive Performance” January - February 1992
By Robert Kaplan and David Norton
1996 2000
Acceptance and Acclaim:
translated into 18 languages
Selected as one of the “most important management practices of the past 75 years.“
Today, about 70% of The Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance
3 reasons why….
Performance Management The Balanced Scorecard
1. Focus on traditional financial accounting measures (such as ROA, ROE, EPS) can give misleading signals to executives regarding quality & innovation.
It is important to look at the means used to achieve outcomes …. not just focus on the outcomes themselves.
Reasons for the Need of a Balanced
Scorecard
2. Performance needs to be judged thru a mix of both financial & non-financial measures to effectively operate a business…As some non-financial measures are drivers of financial outcomes
3. Management benefits from a multi-dimensional perspective which includes not only financial– but customer, internal and organizational learning/improvement perspectives as well…
2. Performance needs to be judged thru a mix of both financial & non-financial measures to effectively operate a business…As some non-financial measures are drivers of financial outcomes
3. Management benefits from a multi-dimensional perspective which includes not only financial– but customer, internal and organizational learning/improvement perspectives as well…
Strategy can be described as a series of cause and effect relationships
Measurement is the language that gives clarity to vague concepts & is used to communicate, not to control.
"If we succeed, how will we look to our
shareholders?”
The Strategy
Financial Perspective
"To achieve my vision, how must I look to my
customers?”
Customer Perspective
"To satisfy my customers, at which processes must excel?”
Internal Perspective
"To achieve my vision, how must my
organization learn and improve?”
Organization Learning
Principles of the Strategy Focused Organization: TRANSLATE THE STRATEGY TO OPERATIONAL TERMS
What is measured gets noticed
What is noticed gets acted on
What is acted on
gets improved
The balanced scorecard disciplines an executive to focus on several important measures that drive the strategy.
-- Too many measures … can confuse and distract an executive from focusing on important strategic priorities.
The balanced scorecard disciplines an executive to focus on several important measures that drive the strategy.
-- Too many measures … can confuse and distract an executive from focusing on important strategic priorities.
The benefit of a Balanced Scorecard
Basic Scorecard Terminology(Southwest Airlines Example)
Objectives
• Fast ground turnaround
Objectives:What the
strategy is trying to achieve
Targets
• 30 Minutes• 90%
Targets:The level of performance
or rate of improvement
needed
• Cycle time optimization
Initiatives:Key action programs
required to achieve targets
InitiativesMeasures
• On Ground Time
• On-Time Departure
Measures:How success
or failure against
objectives is monitored
Strategic Theme: Operating Efficiency
Profits and RONAFinancial
Learning
Ground crew alignment
Lowest prices
Fewer planes
Customer
Internal
Fast ground turnaround
Strategy Map
On-time Service
Attract & Retain More Customers
Grow Revenues
• % Ground crew trained
• % Ground crew stockholders
A Complete Scorecard is a Program for Action
Objectives Measures
• # Customers• FAA On Time
Arrival Rating• Market Survey
• On Ground Time• On-Time
Departure
Strategic Theme:Operating Efficiency
Initiatives
• Cycle time optimization
• Ground crew training
• ESOP
•Customer loyalty
program• Quality management
Targets
• 30% CAGR
• 20% CAGR
• 5% CAGR
• 12% growth• Ranked #1• Ranked #1
• 30 Minutes• 90%
• yr. 1 70%yr. 3 90%yr. 5 100%
• Profitability
• Grow Revenues
• Fewer planes
• More Customers • Flight is on -time• Lowest prices
• Fast ground turnaround
• Ground crew alignment
Strategic Theme: Operations Excellence
Profits and RONAFinancial
Learning
Ground crew alignment
Fewer planes
Customer
Internal
Fast ground turnaround
Attract & Retain More Customers
Grow Revenues
Lowest prices
On-time Service
Capstone Balanced Scorecard