Performance measures Fred Wenstøp

2 The four dimensions of the Balanced Scorecard

Fred Wenstøp3 Financial objectives as a function of life cycle

Fred Wenstøp4 Core Customer objectives  Market share % of volume, customers, revenue; share of wallet, stomach  Customer acquisition ratio of new customer revenue per sales call or solicitation expence  Customer retention rate at which ongoing relationship is maintained  Customer profitability Can be based on activity based costing

Fred Wenstøp5 The internal business process value chain Innovation process Identify market and create product Operations process Build and deliver product Postsale service process Service the customer

Fred Wenstøp6 Innovation process objectives Basic and applied research % sales from new products new product introduction versus competitors manufacturing process capabilities time to develop next generation of products Product development (and same for postsale service) Yields (fraction of compounds that pass to next stage) Processing time Manufacturing cycle effectiveness: –MCE =Processing time/Throughput time Throughput = Processing+Inspection+Movement+Storage Quality (waste, scrap, rework)

Fred Wenstøp7 Learning and Growth Perspective  Employee satisfaction Index based on survey – Involvement with decisions –Recognition for good work –Access to necessary information –Active encouragment to be creative and use initiative –Support level from staff functions –Overall satisfaction with company  Employee retention (to protect investment and prevent loss of knowledge) Key staff turnover (%)  Employee productivity value added per employee or value added / employee compensation

Fred Wenstøp8 Assets Things owned by the business 100 Liabilities Amounts owed by the business 100 Assets Where money is spent 100 Liabilities Where money is obtained 100 Two perspectives on the balance sheet  Traditional perspective  Sources and uses of funds

Fred Wenstøp9 Structure of the balance sheet Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp10 Current assets  Short term assets that can be converted to cash quickly inventories accounts receivable (trade debtors) cash and cash equivalents miscellaneous pre-payments to suppliers Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp11 Fixed assets  All long term assets Intangibles Goodwill, patents, licences Net fixed assets Land and buildings plant and equipment transport computers office equipment Long term investments Shares in associated companies Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp12 Current liabilities  Short term liabilities to be paid within one year Account payable (creditors) Short term loans Bank overdrafts Interst bearing short term debts Miscellaneous Accrued payments interests current tax dividends due Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp13 Long-term loans  All long-term loans more than one year Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp14 Owners’ funds  All claims by the owners on the business Issued common stock Capital reserves Surplus from sources other than normal trading that cannot be distributed Revenue reserves Surplus from trading. Can be distributed as dividends, but not often used for that Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp15 Common terms  Total assets TA = FA + CA  Capital employed CE = FA + CA -CL CE = OF + LTL  Net Worth NW = FA + CA - CL - LTL NW = OF  Working capital (liquidity) WC = CA - CL Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

Fred Wenstøp16 Profit and loss account Sales112 Operating costs100 PBITProfit before interest and tax 12 less interest2 PBT Profit before tax 10 less tax3 PATProfit after tax 7 less dividends 2 RERetained earnings 5

Fred Wenstøp17 Return on investment  ROTA = PBIT/TA Return on total assets Shows how well management uses all the assets in the business to generate an operating surplus  ROE = PAT/OF Return on equity Absolute return delivered to shareholders High ROE leads to a high share price  ROCE = PBIT/(OF + LTL) Return on capital employed