Financial Performance
Mark Fielding-Pritchard
1
Objectives- Drucker
Market
standing
Innovation
Profitability
Productivity
Manager/
worker
Performance
Physical &
Financial
Resources
Public
Responsibility
2
Measuring Growth
Financial
Non Financial

Profitability

Market share

Revenue

No of employees

ROI

No of products

Cash flow
3
Measures of
Long Term
Value
ROCE
Gearing
Liquidity
EPS
Numerical
Measures
IRR/MIRR
EBITDA
NPV
4
Value Measures

For each measure you must be able to calculate and discuss. When
you calculate show the formula you have used and justify why.

ROCE

{Profit/Capital}%
Advantages
Disadvantages
Easy to calculate
Poor correlation between ROCE and
shareholder value
Figures available
Comparison difficult
Measures how well the organisation uses
funds provided
Accounting distortions
Commonly used
ROCE can be improved by reducing
5
investment
EPS

Profit/ No of shares
Advantages
Disadvantages
Easy to calculate
Poor correlation between EPS and
shareholder value
Figures available
Accounting distortions
Calculation defined in accounting
standards
Very commonly used
6
EBITDA

Earnings before interest, tax and depreciation
Advantages
Disadvantages
Cash flow proxy
Ignores working capital changes
Externally generated tax and
Ignores reinvestment
interest not relevant to underlying requirements
success of business
Depreciation and amortisation are Accounting distortions
excluded as not being current
7
NPV

Compare discounted future cash flows with current investment
Advantages
Disadvantages
Strong correlation with
shareholder value
Considers time value of money
and risk
Uses cash flow
Difficult to calculate and
understand
Assumptions can be very broad
NPV often used for project
appraisal, profit or EPS for
manager bonuses
8
IRR/ MIRR

Calculates the yield on investment

MIRR smooths cash flows where multiple IRRS occur
Advantages
Strong correlation with shareholder
value
Considers time value of money and
risk
Uses cash flow
Disadvantages
Difficult to calculate and understand
Assumptions can be very broad
Is a % so a project with investment of
$1 and return of 20c will be
considered better than investment
$20m and $1.5m return
9
Liquidity Ratios
 Current
 Acid
ratio
ratio
 Interest
cover
 Gearing
 Working
capital management ratios
10
Short Term Performance Measures
Working
capital
management
Control
Determining
rewards
Assessing
past
performance
11
Steps to Reduce Short Termism
Use financial and non
financial measures
Switch from a budget constrained style
Share options
Bonuses
NPV & IRR
Reduce decentralisation
Value based techniques
12
Q45 Bettaserve
Mission Statement a formal summary of the aims and
values of a company, organization, or individual "a mission
statement to which all employees can subscribe“
 Should be
 Succinct
 Memorable
 Enduring
 Guide for employees
 Addressed to all stakeholders

13
Mission Statement Examples
 BBC Pepsi,
inform, educate, entertain
beat Coke
 Microsoft-
to enable people and
business throughout the world to realise
their full potential
14
Q45 Bettaserve
 Own
 Key
concept & mission
competitors
 Own
strategies
15
Q45 Bettaserve ii)

Marketing

We see market share increasing so the increase in
quality is acting as a marketing tool in itself

Financial

The growth in sales is matched by a fall in total costs
so profitability rises as does cycle time

Sales rise from 30m to 40m, costs fall from 28.2m to
25.1m
16
Q45 Bettaserve iii)

Quality

The whole project is driven by quality. The project is t
provide not only the products customers require but
to ensure that corrective work is reduced. We see this
in services without rectification falling from 5% to 2%
with a decline in costs from 0.9m to 0.2m

Delivery

Delivery is part of the quality function. We see
delivery time met rising from 90% to 99%

External effectiveness here means customer
satisfaction
17
Q45 Bettaserve iv)

Internal Efficiencies

Cycle Time

CT reduces from 6 weeks to 5, that will only happen
with increased efficiency. Increased efficiency will
bing the cost reductions shown from 28.2m to 25.1m

Waste

The increased efficiencies result in sales enquiries not
taken up falling from 7.5% to 2.5% and idle time
falling from 10 to 2%
18
Q45 Bettaserve b)
Vision
Close cooperation
Quality
Marketing
Specific
Design
Finance
Low
Rectification
19
Q45 Bettaserve iv)
 Vision
is close co-operation with client
 Provide
 High
 In
bespoke quality product
satisfaction levels generate sales
turn increases profits
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Q47 Alpha Division a)i)
Year 1
Cashflow 12.5
Depn
(15)
Cost of
(4.5)
Capital
(7)
Year 2
18.5
(15)
(3)
Year 3
27
(15)
(1.5)
0.5
10.5
21
Q47 Alpha Division a)ii)

Variable Short Run Contribution

Good

Calculates the contribution to fixed overhead so
shows genuinely ‘profitable’ products

Bad

If it includes inter division transfers then it may not
be controllable

Short run
22
Q47 Alpha Division a)ii)

Controllable Profit

Good

Controllable

Bad

What is controllable and what is not? If HQ order
labour cost reductions are those costs controllable?

Short run
23
Q47 Alpha Division a)ii)

Divisional Profit

Good

Includes all costs

Bad

Depreciation and legal department costs are not
controllable

There may be disagreements on allocations of
overheads
24
EVA
In corporate finance, Economic Value Added (EVA), is an
estimate of a firm's economic profit – being the value created
in excess of the required return of the company's investors
(being shareholders and debt holders). Quite simply, EVA is
the profit earned by the firm less the cost of financing the
firm's capital.
The formula for calculating EVA is as follows:
= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of
Capital)

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EVA

NOPAT is the after tax cash available for distribution to capital
providers

Depreciation of ‘normal’ assets is not adjusted for as this is
considered to be required for reinvestment

Interest is added back as all capital providers are considered as 1
group
Post tax profit
Goodwill
Non cash expenses
Interest
2006
67
2007
82
5
12
4.2
5
12
4.2
88.2
103.2
26
EVA WACC

This represents the cost of capital
Calculation of Capital
2006
Opening
279
Leases
16
Goodwill
45
340
2007
340
16
50
406
27
EVA WACC
Calculation of Cost of Capital
2006
Equity
50%x 340 x 16%=
27.2
Debt
EVA
2006
88.2- 39.1= $49.1m
2007
50%x 406 x 18%=
36.5
50% x 340 x 10% x
70%= 11.9
50% x 406 x 10% x
70%= 14.2
39.1
50.7
2007
103.2- 50.7= $52.5m
28
Disadvantages of EVA
 Difficult
to calculate
 Difficult
to compare
 Subject
to accounting differences
29