According to the financial performance measurement, any organization has to live within financial constraints and to deliver perceived value for money to its stakeholders. The role of the financial function is to manage the financial resources of the organization, and to ensure that the financial constraints it faces are not breached. Otherwise, the organization may lead to financial distress or financial failure or bankruptcy. In addition, the role of the financial performance measurements is to help keep the organization on the financial "straight and narrow" track.
Therefore, the financial planning and control is an essential part of the overall management process. Establishment of precisely what the financial constraints are and how to proposed operating plans will impact upon the, are a central part of the financial function. There are three main focusing areas for the financial plans which are cash flow, profitability, assets.
The "Pyramid of Ratio" is a tool for financial performance measurement.
Overall measurement of profitability that divides profit by the assets used in generating that profit ïƒ Return on capital
Return on capital = product of profit margin on sales / capital turn over
The pyramid can be provided by considering the purpose of calculating each ratio. Thus, if the concern is with cash flows and liquidity, a range if ratios based on working capital are appropriate. Therefore, five main ratios are commonly calculated.
Current ratio = Current assets / Current liabilities
Quick ratio = Quick assets / Current liabilities
Inventory turnover period = Inventories / Cost of sales
Average collection period = Debtors / sales
Average payment period = Creditors / Purchases
Each ratio has conventional values, for example; the current ratio standard value is 2.0 and the standard quick ratio is 1.0. Therefore, it is also clear that evidence of financial problems may occur because of deficiencies in other areas of business operations. In this case, the ratios provide the finance director with the information necessary to convince other managers that operating action needs to be taken in order to avoid financial distress. After that all the financial performance measurement data will be send to all the employees as the stakeholder as soon as the analysis is done. Therefore, all the information will send to the stakeholder via email, weekly newspaper, or other in-house communications method. According to the business plan 1, the plan does not include the financial information. Therefore, the financial performance measurement cannot be done for the business plan 1.
Development and Implement Business Plan
Assessment Task 3 - Monitor Performance
Business plan 1
Report for Non-financial performance measurement
According to the business performance measurement, both of the non-financial and financial measurement was used.
Non-financial performance measures are often used for performance evaluation. They are especially relevant if the available financial performance measures not completely reflect the manager's contribution to the firm's total value. Then, non-financial performance measures serve as an indicator for the firm's long-term performance and may therefore be included in incentive contracts.
From the point of view non-financial measures can be helpful because any combination of costless performance measures that reduces the risk imposed on the agent through an incentive contract is beneficial to the principal. Non-financial performance measures such as customer satisfaction, product quality, or employee turnover are especially relevant in cases where market-based performance measures showing the total firm value are not available.
Compared with the accounting-based performance, the manager is therefore expected to have pre-decision information about his impact on the non-financial performance. To summarize the characteristics of the non-financial performance measures considered subsequently, we assume
The non-financial performance to be an indicator of the long-term financial return with no intrinsic value to the director
The manager's influence on the non-financial performance to be unknown to the director.
Both, the relation between non-financial performance and long-term financial return as well as the uncertainty regarding the determinants of the non-financial performance are expected to influence the relevance of non-financial performance measures for performance evaluation and management compensation.
By following the steps listed below, companies should be able to realize the full promise of non-financial performance measurement.
For a casual model, the developed model is based on hypotheses in the in the strategic plan.
Most of the companies already track large numbers of nonfinancial measures in operation daily. Moreover, the company needs to take care of their inventory of the database. This inventory should not limit itself to performance measurement system but should extend to any information systems. After collecting the data, there are many statistical methods for testing the casual model. Most companies have experience using correlation analyses and multiple regressions in their market research and quality improvement efforts, for example; Sears approach. For the continually refine the model, the company should not stop for the refinement process because the business does not know whether the plan is gone deep enough or not. Therefore, the conclusions drawn from data analyses must be used in decision making if nonfinancial performance measure are to improve financial results. The final step in the performance measurement process is determining whether the action plans and the investments that support them actually produced the desired results.
For the business plan 1, all the data from the keys to success such as customer or client satisfaction, are collect from the survey process. All the data will be analyze by using the statistical method. Then, the analyzed information will be used to discuss about the business plan. After the discussion and evaluation, the actions to develop and improve the business plan will be taken.
Moreover, all the nonfinancial performance measurement data such as system failure, product failures as well as variance will be send to all the employees as the stakeholder as soon as the nonfinancial performance analysis are done. Therefore, all the information will send to the stakeholder via email, weekly newspaper, or other in-house communications method.
