The performance measurement system of a firm has a strong influence on the behavior of its people. Performance measurement is the basis of every system like cost system, planning system, capital budgeting system, personal assignments, promotions, reorganizations, budget allocations- the mechanisms, built up over years by which every thing runs in a company. Organizations measurement system strongly affects the behavior of people both inside and outside the organization.
In this coursework two French companies called Renault and L'Oreal has been chosen. The main aim of this coursework is find out the financial performance, strategies used by these firms and their conduct. The main purpose of this study is gain insight into the performance measurement design of these French firms.
Gross margin of L'Oreal amounted to 70.5% of sales. The improvement of 10 basis points reflects efficiency gains in plants and gains on purchasing, and, on the other hand, extra costs linked in particular to monetary parities. This improvement in gross profit was particularly significant in the second half of 2009.
The automotive market of Renault is expected to grow by 3% in 2010 compared with 2009, but with significant disparities between regions. In two of the main regions in which Renault is present, Europe and Euromed, markets are expected to shrink by around 10% on 2009. We therefore expect 2010 to be another tense year and, once again, our main objective is to generate positive free cash flow.
Strategic objective of Renault:
.
Aiming to be pioneers in the mass marketing of electric vehicles while continuing to improve the efficiency of combustion engines.
Continue to boost sales on emerging markets, especially by position in countries where Renault already present, such as Russia, India and Brazil.
Expand commercial offensive in Europe, particularly by strengthening the respective positions of brands, Renault and Dacia.
Consolidate position as a leader in low-cost vehicles with the Logan platform, and use future ultra-low cost vehicle as a lever for our international development.
Step up the development of joint policies within the Alliance, which is crucial in achieving these objectives.
The increase in 2009 of the driving forces of L'Oreal represented by research and advertising & promotion expenses, which are essential for the lasting support and sustainable development of the company's brands, was approved as their strategic objective.
Introduction
Performance measurement refers to the system by which the performance of a company is measured in terms of financial and non-financial areas. Performance measurement is the process whereby an organization establishes the parameters within which programs, investments, and acquisitions are reaching the desired results. Performance measurement sometimes rely heavily financial measures. A company is likely to concentrate on activities like product development, manufacturing, and customer service. In order to maintain competitive edge, the performance measurement tools should be well-conceived and designed.
Principles of performance measurement
All significant work activity must be measured.
Work that is not measured or assessed cannot be managed because there is no objective information to determine its value. Therefore it is assumed that this work is inherently valuable regardless of its outcomes. The best that can be accomplished with this type of activity is to supervise a level of effort.
Works which are unmeasured should be minimized or eliminated.
For all measured work, desired performance outcomes must be established.
Outcomes provide the basis for establishing accountability for results rather than just requiring a level of effort.
For work evaluation and meaningful performance appraisal, desired outcomes are necessary.
Defining performance in terms of desired results is how managers and supervisors make their work assignments operational.
Performance reporting and variance analyses must be accomplished frequently.
Frequent reporting enables timely corrective action.
Timely corrective action is needed for effective management control.
The basic purpose of performance measurement system is to provide feedback, relative to the goals, that increases chances of achieving the goals efficiently and effectively.
Performance measurement measures can be financial as well as non-financial. Financial measures include:
Return on capital employed, Return on investment, Return on equity, Return on sales, Economic value added, Profit after tax, Market capitalization etc.
Non-financial measures include:
Customer satisfaction index, Customer returns, market share, new product introduction, On-time delivery Employee productivity index, manufacturing cycle index etc.
Both L'Oreal and Renault have almost all the above mentioned financial and non-financial measures. For example, the main objective of Renault in 2009 was to achieve free positive cash flow and this plan was organized in three parts namely maximizing revenues by improving market share, reducing working capital and reducing fixed cost.
L'Oreal received top marks in financial performance, appeal, leadership, products and services.
Several performance measurement systems are in use today, and each has its own group of supporters. For example, the Balanced Scorecard
Balanced Scorecard
Most companies have a performance measurement system that includes financial measures as well as non-financial measures. Financial measures are used primarily by senior managers to monitor the performance of the firm as a whole and its business units or divisions. Non financial measures are employed mainly by operating managers to control short-temporary operations. The balanced scorecard approach pioneered by Robert Kaplan, David Norton and others seeks to develop an integrated performance measurement system.
Structure of a Balanced Scorecard
How do we look to shareholders?Financial perspective
How do customers see us?
Goals
Measures
Customer perspective
Goals
Measures
Internal business perspective
Goals
Measures
Innovation and learning perspective
Goals
Can we continue to improve and create value?Measures
Both L'Oreal and Renault have performance measurement systems. If we apply balanced score card for these companies we can find out how well they are performing in all perspective in business. Financially both these companies are doing well. They are well doing with their shareholders. Their internal business perspective is also very good comparatively. Renault is innovative with the new technologies where by they are able to meet customer needs as per their requirement. L'Oreal is also making innovations in their cosmetic segment. Both these companies have a good customer relation
Aim of the Study
The aim of this study is assess the financial performance of Renault and L'Oreal and find out the performance measurement systems adopted by these firms.
Result of the Study
Financial Performance of Renault (2009)
Liquidity Ratios
Current Ratio
= __ Current Assets___
Current Liability
= __ 5,941.1_
35,795
= 0.947
Acid-test Ratio
= __Quick Assets__
Current Liability
= __Current Asset - Inventories__
Current Liability
= ____33,913 - 3,932____
35,795
= 0.83
Leverage Ratios
Debt-equity Ratio
= _ Debt__
Equity
= __ Debt_______________
Net worth + deferred tax liability
= ____47446____
16,472 + 114
= __47446___
16586
= 2.86
Debt -asset ratio
= ___Debt___
Asset
= ___Debt___
Equity + Debt
= _47446_
16586 + 47446
= 0.74
Turnover Ratios
Inventory Turnover Ratio
= ___Cost of good sold___
Average Inventory
= ___ 26,978 ___
(3,932 + 5,266) / 2
= 5.87
Fixed Assets Turnover Ratio
= ________Net Sales_______
Average net fixed assets
= ____32,415_____
(30,000 + 32,553) /2
= 1.036
Total Assets Turnover Ratio
= ____Net Sales_____
Average total assets
= ____ 32,415______
(63,978 + 63,831) /2
= 0.507
Profitability Ratios
Gross Profit Margin Ratio
= ___Gross Profit / Loss___ x 100
Net Sales
= ___ (396) ___ x 100
32,415
= (1.22) %
Net Profit Margin Ratio
= _____Net Profit/ Loss___ x 100
Net Sales
= ____ (3,068) ___ x 100
32,415
= (9.446) %
Return on Equity
= ___Equity earnings__
Average equity
= ___ (3,068) _______* 100
(16,472 + 19,416) / 2
= (17.097) %
Financial Performance of L'Oreal
Liquidity Ratios
Current Ratio
= __ Current Assets___
Current Liability
= __ 5,941.1_
5,386.5
= 1.103
Acid-test ratio
= __Quick Assets__
Current Liability
= __Current Asset - Inventories__
Current Liability
= ____5,941.1 - 1,476.7____
5,386.5
= 0.829
Leverage Ratios
Debt-equity Ratio
= _ Debt__
Equity
= __ Debt_______________
Net worth + deferred tax liability
= ____9693.1__
13,598.3 + 418.0
= __9693.1___
14016.3
= 0.692
Debt -asset ratio
= ___Debt___
Asset
= ___Debt___
Equity + Debt
= _9693.1
13,598.3 + 9693.1
= 0.416
Turnover Ratios
Inventory Turnover Ratio
= ___Cost of good sold___
Average Inventory
= ___ 5,161.6 ___
(1,476.7 + 1,635.5) / 2
= 3.317
Fixed Assets Turnover Ratio
= ________Net Sales_______
Average net fixed assets
= ____17,472.6_____
(17,350.4 + 16,380.3) /2
= 1.036
Total Assets Turnover Ratio
= ____Net Sales_____
Average total assets
= ____ 17,472.6_____
(23,291.5 + 22,906.9) /2
= 0.756
Profitability Ratios
Gross Profit Margin Ratio
= ___Gross Profit / Loss___ x 100
Net Sales
= ___ 12,311.0___ x 100
17,472.6
= 70.45 %
Net Profit Margin Ratio
= _____Net Profit/ Loss___ x 100
Net Sales
= ____ 1,794.9 ___ x 100
17,472.6
= 10.27 %
Return on Equity
= ___Equity earnings__
Average equity
= ___ 1,794.9 _______x 100
(13,598.3 + 11,562.5) / 2
= 14.267 %
Findings
Comparison between financial performance of L'Oreal and Renault:
Financial Ratios
Renault
L'Oreal
Liquidity Ratios
Current Ratio
Acid-test Ratio
0.947
0.838
1.103
0.829
Leverage Ratios
Debt-equity Ratio
Debt-asset Ratio
2.86
0.74
0.692
0.416
Turnover Ratios
Inventory Turnover Ratio
Fixed Assets Turnover Ratio
Total Assets Turnover Ratio
5.87
1.036
0.507
3.317
1.036
0.756
Profitability Ratios
Gross Profit Margin Ratio
Net Profit Margin Ratio
Return on Equity
(1.22)%
(9.446)%
(17.097)%
70.45%
10.27%
14.267%
Interpretations:
Liquidity Ratio of a firm refers to the ability of a firm to meet its obligations in the short-run. L'Oreal has higher current ratio compared to Renault. It is clear that L'Oreal has the ability to meet its obligations within time as compared to Renault.
Acid-test ratios of both the firms are some what same.
Financial leverage refers to the use of debt finance. Debt -equity ratio is L'Oreal is lower as compared to Renault which shows that the creditors of L'Oreal are enjoying higher degree of protection.
Debt-asset ratio measures the extent to which borrowed funds support the firm's assets. In this context, L'Oreal is having low ratio compared to Renault. This implies that Renault is using borrowed funds to invest in assets.
Inventory turnover ratio measures the speed with which inventory is moving through the firm and generating sales. Renault is having higher inventory turnover ratio, it shows that it has efficient inventory management as compared to L'Oreal.
Fixed asset turnover ratio is same for both the companies. Higher ratio indicates a high degree of efficiency in asset utilization.
Total asset turnover ratio measures how efficiently assets are employed, overall. Overall L'Oreal has efficient employment of assets compared to Renault.
When we compare the profitability ratio of both the firms, it is clear that Renault is having a negative figure which implies that it has incurred huge loss in the year 2009. L'Oreal's profitability is high and it is generating positive cash flows.
Conclusions
It can be concluded that the performance of L'Oreal is good as compared to Renault in the year 2009 as they have incurred net loss. Renault group has increased its market share to 3.7%. Even though it has incurred net loss in the end of 2009, it has increased its market share by increase in sales volume and efficient inventory management. Renault has high leverage funds invested which is the cause of loss and moreover Renault has financed its fixed assets through debt.
L'Oreal on the other hand has a good financial performance because of its effective management of funds. It has incurred profit in the year 2009, so financial performance of L'Oreal is better than Renault.
