Enterprise Performance Management (EPM)

What is enterprise performance management?

Enterprise Performance Management (EPM) software helps you analyze, understand, and report on your business. EPM refers to the processes designed to help organizations plan, budget, forecast, and report on business performance as well as consolidate and finalize financial results (often referred to as “closing the books”). EPM solutions are primarily used by CFOs and the office of finance, while other functional areas, such as HR, sales, marketing, and IT, use EPM for operational planning, budgeting, and reporting.

The EPM cycle

While often tied to enterprise resource planning Enterprise Resource Planning systems, EPM software complements ERP by providing management insights in addition to top of operational data. In other words, ERP is about operating the business—the day-to-day transactional activity—and EPM is about managing the business—analyzing, understanding, and reporting on the business.

Today, EPM software is considered to be critical for managing all types of organizations by linking financial and operational metrics to insights—and ultimately driving strategies, plans, and execution. With EPM software, managers can drive improved performance across the organization by monitoring financial and operational results against forecasts and goals and using analytics to recognize key trends and predict outcomes.

In an environment of constant change, new competitors, and economic uncertainty, EPM offers a tool for organizations to manage their agile businesses. With finance at the helm, EPM business processes (strategic modeling, plan, consolidate and close, report, and analyze performance) can help organizations understand their data and use it to make better business decisions.

Business value of EPM software—critical in uncertain times

The key to surviving disruption is flexibility. Whether the disruption comes from outside forces (such as new regulations or global weather events) or market realities (one product skyrockets to success while another flops), organizations that respond quickly are able to stay ahead of the curve. A modern EPM solution enables you to understand how, when, and where to adjust to disruptions.

Optimize the financial close In a changing regulatory environment, you need to adapt quickly to new requirements and deliver faster, more accurate insights to all stakeholders. EPM helps you streamline the financial close and report with confidence and insight.

Streamline account reconciliation Account reconciliation is the number one reason for non-data-related delays in the financial close. EPM enables you to efficiently manage and improve global account reconciliation by exploiting automation and comprehensively addressing the security and risk typically associated with this process.

Drive accurate and agile integrated plans—The digital economy demands more than spreadsheets and department-oriented planning processes. Truly effective planning should seamlessly connect your entire organization for a better vision. With EPM you can align planning across the enterprise, so that you can develop agile forecasts for all lines of business and respond faster and more effectively to change.

Manage and drive profitability—To survive in uncertain times, you must be able to manage and drive profitability. EPM helps you gain insight into dimensions of cost and profitability to determine where to invest limited resources.

Align tax reporting with corporate financial reporting—Changing tax laws are causing global organizations to plan and manage their tax affairs very differently than they have to-date. EPM supports effective tax reporting by connecting the processes, data, and metadata that tax and finance share, such as financial planning, financial close, and regulatory reporting.

Satisfy all your reporting requirements—No matter how many reporting standards you have to comply with, you want to be sure that the data you provide in your reports is accurate, complete, and the most current information available. EPM reduces the need for multiple reporting systems.

Manage change with enterprise data management—Whether you're migrating applications to the cloud, managing applications in a hybrid environment, or spearheading major business and financial transformation, an enterprise data management platform provides data accuracy and integrity with the alignment of your data and master data.

Next-generation EPM—analysis to action

Historically, EPM systems have focused on transitioning finance from spreadsheets to more robust solutions that let teams spend less time on low-value tasks such as data manipulation and reconciliations and more time on high-value tasks like analysis. But even after making the move from spreadsheets, there’s still too much time between analysis and action.

Enter the next generation of EPM, which has new capabilities that incorporate emerging technologies, such as artificial intelligence and machine learning. These technologies are powerful decision-making tools because they close the gap between analysis and action. They help improve the quality of decisions made by finance managers and executives by detecting hidden patterns and insights in historic data. The impact on decision-making is widespread, from tactical (which vendor to pay first) to operational (budget reallocations) to strategic (mergers and acquisitions).

Beyond decision-making, these technologies can automate routine tasks to eliminate manual labor and reduce the likelihood of errors. There are many tasks in the financial close and reconciliation process that fall into this category. This type of automation will free up valuable time for finance professionals to engage with operations and spend more time providing the forward-looking guidance that management needs to capitalize on the next opportunity.

Enterprise Performance Management (EPM) is the process of monitoring performance across the enterprise with the goal of improving business performance. An EPM system integrates and analyzes data from many sources, including, but not limited to, e-commerce systems, front-office and back-office applications, data warehouses and external data sources. Advanced EPM systems can support many performance methodologies such as the balanced scorecard.

History of EPM

The concept of EPM has been around for decades. Before computers, EPM processes and solutions were managed manually via meetings, phone calls, and discussions. In the 1970s, the first EPM software applications became available and accounting solutions began collecting budgeting and financial information for reporting purposes. Spreadsheets were introduced in the 1980s with software such as Lotus1-2-3 and VisiCalc. Spreadsheets allowed finance teams to automate budget and report creation and replace manual worksheets. The availability of email in the 1990s allowed people to share spreadsheets, which led to better collaboration and collection of budgeting and reporting data. Around the same time, the first EPM software packages began to automate the financial consolidation and reporting process. These products included: IMRS Micro Control (which later became Hyperion software), Hyperion Enterprise for financial consolidation and reporting, and Hyperion Pillar for planning processes.

EPM today—from on-premises to the cloud

Over the past couple of decades, EPM software platforms evolved from Windows-based client/server systems to internet-enabled, web browser-based applications. Today, there’s an increasing demand for cloud-based EPM software, also known as software as a service (SaaS). When EPM software is “in the cloud” it simply means that the application is housed on a network of remote servers, instead of at a company’s location.

The cloud offers a more affordable alternative for EPM that lowers both operational expenses and capital expenses, because it eliminates the need for companies to purchase software and hardware or hire additional IT staff. With no costly infrastructure to support, resources can be invested in growth opportunities, while employees can focus on more value-added tasks instead of managing IT.

Next-generation EPM—analysis to action

What is Enterprise Performance Management (EPM)?

Enterprise Performance Management, more commonly referred to as EPM, is a type of business planning used by a wide range of entities that involves the evaluation and management of an enterprise’s performance and ability to reach goals, increase efficiency, and maximize business processes. EPM drives the improved performance of an enterprise by comparing its results to its forecasts and goals.

The concept of EPM has existed for decades, spanning back to the Industrial Revolution as businesses then sought to automate processes to maximize their efficiency and increase their bottom line. In the 1970s the first rudimentary EPM software was implemented, paving the way to where we are now. EPM in the present makes the most out of today’s technology through the use of on-premises and cloud software systems to aggregate and analyze data.

EPM business processes

The business processes associated with EPM can be broken down into five functional areas: Strategic modeling, planning and budgeting, close and consolidation, reporting, and performance analytics. Read on for an overview of each of these areas.

Strategic modeling

Strategic modeling allows users the opportunity to develop long-range strategic forecast models. It is useful for detailed forecasting and analysis of trends and frees up time spent on manually gathering data. Strategic modeling gives users a sense of confidence in the accuracy of their projections, reports, and audits.

Planning and budgeting

Using EPM software for planning and budgeting gives users flexibility and scalability with their forecasts. While standard EPM products include out-of-the-box planning content, others, such as Oracle EPM, go a step further and provide the user with the ability to create custom parameters for future planning and budgeting.

Close and consolidation

EPM software can be used for streamlining financial close and consolidation, making it easy for users to report on their business with confidence. This support gives users peace of mind when it comes to meeting global regulatory requirements and provides the requisite transparency of data for stakeholders both internal and external.

Reporting

Financial reporting has been revolutionized by EPM software. It provides a format for neat, consistent, standardized reporting. EPM software can be used to consolidate briefs into executive reports, distribute report content to stakeholders, and integrate financial decisions, among other functionalities.

Performance analytics

Analyzing past performance is made easier and more accurate than ever before with EPM technology. EPM technology is used to conveniently analyze trends across years, divisions, and against planned performance. This data creates a holistic picture of the enterprise that is invaluable for leadership, management, and stakeholders.

Why do we need EPM?

With EPM you can align planning across the enterprise, so that you can develop agile forecasts for all lines of business and respond faster and more effectively to change. Manage and drive profitability—To survive in uncertain times, you must be able to manage and drive profitability.

What are the components of EPM?

Some of the key components of EPM systems include planning, budgeting, and forecasting capabilities and the ability to monitor KPIs, provide analysis, and manage reporting.

Effective enterprise performance management (EPM) is the key to business success. Having a great business strategy is only the first step to growing a sustainable business. You also need clearly defined objectives and effective processes that provide structure and direction in achieving those goals. But, perhaps even more importantly, you need a system for tracking.

Effective enterprise performance management (EPM) is the key to business success.

Having a great business strategy is only the first step to growing a sustainable business. You also need clearly defined objectives and effective processes that provide structure and direction in achieving those goals.

But, perhaps even more importantly, you need a system for tracking and measuring performance so you can continue to improve performance.

To paraphrase management guru Peter Drucker, you can’t manage what you don’t measure.

A big challenge for any business is balancing the long-term strategic priorities of the business with short-term operational priorities. Failing to balance strategic and operational needs leads to organizations underperforming.

If too much focus is given to immediate operational concerns, strategic objectives fall by the wayside. Similarly, if all the focus is on the big goals, critical operational issues often aren’t recognized and addressed in time. This can result in delays, under-resourcing, and high employee turnover.

This balancing act is part of the job for execs and managers. It’s made easier with the right management system.

In this article, we’ll explore how an enterprise performance management system enables managers to translate strategic priorities into operational actions and to measure—and improve—the effectiveness of both.

Enterprise performance management (EPM) refers to the systems and processes involved in setting strategic business goals, translating these goals into measurable objectives, planning operations and allocating resources, and tracking enterprise performance against these goals.

EPM involves actively collecting and analyzing data to report on past performance, forecast future success and failure scenarios, and plan and implement strategic interventions to continuously improve performance.

On a strategic level, EPM is the domain of decision-making executives—CFOs in particular. It is used for operational planning, budgeting, and KPI tracking and reporting by units or departments throughout the organization. This includes human resources, I.T., product, marketing, sales, customer service, and finance teams.

Enterprise performance management is also sometimes referred to as business performance management (BPM), corporate performance management (CPM), and financial planning and analysis (FP&A).

EPM vs enterprise resource planning (ERP)

While EPM is often in conjunction with ERP, they are not interchangeable.

ERP, enabled through ERP systems, covers the day-to-day transactional activities involved in managing operations. EPM analysis goes beyond operational data to provide an extra layer of managerial insights to help inform strategy decisions.

Benefits of enterprise performance management

At its core, the function of enterprise performance management is to improve organizational efficiency by balancing high-level business strategy with operational performance.

This clarity of purpose offers employees throughout the organization increased stability and a greater sense of direction and unity—which in turn translates into better strategic alignment across departments.

Improved business intelligence

By setting clear goals and actively tracking performance against key performance indicators (KPIs) across the organization, managers and teams have a cohesive view of the current status of the business.

This data empowers management to run projections, identify opportunities and threats, and make informed decisions to improve efficiency and profitability.

Improved profitability

By continuously monitoring the business’s financial performance and tracking margins, EPM can help business leaders to predict the profitability of future initiatives and scenarios.

This enables them to adjust their strategy to take advantage of opportunities and avoid pitfalls, removing inefficiencies and maximizing returns.

Greater regulatory oversight and compliance

Accurate, real-time data from touch points throughout the business makes it easier to ensure regulatory compliance.

Many modern EPM systems offer features that assist companies to generate detailed reports. This makes financial close easier by automating corporate financial reporting and tax reporting.

Streamlined financial processes

By promoting detailed expenditure projections, EPM facilitates better financial planning and analysis, resulting in more accurate budgets.

With process automation and continuous tracking, EPM streamlines financial consolidation by removing a lot of the time-consuming admin. It also reduces errors from the process of reconciling the books for financial close.

The enterprise performance management process

Here’s how the EPM process typically looks:

1. Consult data from all business units

Detailed, up-to-date data enables businesses to make strategic planning decisions based on past performance and informed projections. The more of your business processes that are digitized and automated, the easier it will be to consolidate this data. EPM software with decent data analytics capabilities will help you create realistic forecasting models based on past performance data.

2. Develop a strategy

After analyzing the data, identify new strategic performance goals that will improve the organization’s performance and profitability. The more specific you can be about the desired outcomes and the actions needed to achieve them, the better. Create clear objectives and define metrics or KPIs with which to track them.

3. Budget and resource

Create a detailed plan (with some flexibility built-in) describing the capital and resources required to execute the initiatives described in your strategy. Once again, data from previous years will help inform this process. However, be sure to consult key unit stakeholders to collaboratively establish accurate costing estimates, especially for new (previously unseen) projects.

4. Execute, track, and report

Continuously track performance across all units of your organization using pre-defined metrics that measure whether initiatives are in alignment with the company’s strategic goals. Prepare scorecards and reports that make it easy to identify successes, shortfalls, bottlenecks, and other key information that can help determine whether strategy or workflow adjustments are needed. Explore our comprehensive guide on performance review phrases to enhance your feedback sessions.

Analyze and assess

Review your reports to see how well the company’s performance aligned with its strategic goals. Identify opportunities for improvement and investigate the root causes of underperforming areas. Use this business intelligence to drive and inform your strategy for the next cycle.

Enterprise performance management is an iterative process, meaning it is likely to take a few cycles to get it right.

One of the common pitfalls many companies fall into is failing to translate their ambitious goals into specific targets and actions that managers can understand, execute, and measure effectively.

To help with this, Liz Lockhart’s article on cascading goals is a great place to start.

If you’d like to dive into enterprise performance management in more detail, have a look at the closed-loop management system developed by Robert S. Kaplan and David P. Norton.

Published in HBR in 2008, it’s slightly dated now (i.e. it doesn’t take into account the data analytics capabilities of the software available today), but it’s still a compelling read and the strategic insights it contains are solid.

How do you manage business performance?

Businesses across all industries benefit from implementing proper enterprise performance management. Of course, needs will vary and organizations will enter at different starting points.

Business leaders today have the distinct advantage of technologies that use machine learning help to automate much of the heavy lifting when it comes to reporting, data analysis, and forecasting.

It’s just a matter of selecting the right EPM solution for the job.

To see what options are available, and choose the right solution for your business, check out our pick of the best enterprise performance management software on the market today.

What is the difference between management controls and operational controls?

Strategic control involves monitoring and adjusting an organization's overall strategy to ensure that it is aligned with its mission and objectives. Operational control, on the other hand, involves the day-to-day management of the organization's operations to ensure they are efficient and effective. In summary, strategic control deals with long-term goals and direction while operational control deals with the current performance and execution of tasks.

Strategic Control	Operational Control
Long-term focus and goals	Short-term focus and specific tasks
Top-level management is responsible	Middle/lower-level management is responsible
Broad scope and strategic perspective	Narrow scope and operational perspective
Evaluates overall performance and progress towards long-term goals	Monitors day-to-day performance and progress towards specific tasks
Looks at external factors such as market trends and competition	Looks at internal factors such as resources and efficiency
Uses financial metrics such as return on investment and profitability	Uses operational metrics such as productivity and quality control
Involves making strategic decisions such as entering new markets or developing new products	Involves implementing decisions made at higher levels, such as how to manufacture a product efficiently
Example: Deciding to enter a new market or developing a new product	Example: Deciding how to manufacture a product efficiently or managing inventory levels

Key differences between Strategic Control and Operational Control

Strategic control focuses on the long-term goals and objectives of an organization, while operational control focuses on the day-to-day management of the organization's operations.

Strategic control involves setting overall direction for the organization, while operational control involves ensuring that the organization's operations are executed efficiently and effectively.

Strategic control involves making decisions at a higher level of management, while operational control involves making decisions at a lower level of management.

Strategic control involves monitoring the organization's external environment, while operational control involves monitoring the organization's internal operations.

Strategic control is typically the responsibility of top management, while operational control is typically the responsibility of middle and lower management.

Strategic control focuses on the overall performance of the organization, while operational control focuses on the performance of specific departments or functions.

Strategic control involves making decisions about resource allocation, while operational control involves managing the use of those resources.

Strategic control is more forward-looking, while operational control is more focused on the present.

Management controls: The security controls that focus on the management of risk and the management of information system security. Operational controls: The security controls that are primarily implemented and executed by people.

What Strategic Control does?

Steps for Operational Control

Set performance standards
Measure actual performance
Identify deviations (if any)
Introduce corrective actions

The focus of operational control is on the result of the strategic action, which assesses the overall organization’s performance, different SBU’s and other divisions and units.

Techniques used for Operational Control

Financial Techniques
Network Techniques
Management by Objectives
Memorandum of Understanding

Financial performance measures a firm's financial health based on assets, liabilities, revenue, expenses, equity, and profitability. It is a thorough analysis of company financial statements. Analysts examine a firm's Income Statement, Cash Flow Statement, Balance Sheet, and Annual Report.

The overall performance and position of the business should be evaluated based on a set of criteria that includes liquidity, solvency, profitability, financial efficiency, and repayment capacity. Each of these criteria measures a different aspect of financial performance and/or position.

financial performance measures an organization’s ability to manage finances. It is evaluated based on a firm’s assets, liabilities, revenue, expenses, equity, and profitability.

Financial ratios serve as crucial indicators. It measures firms’ financial well-being using data provided in financial statements.

Financial performance metrics include quick ratio, current ratio, working capital, gross profit margin, net profit margin, equity multiplier, debt-to-equity ratio, return on equity, return on asset, total asset turnover, inventory turnover, and operating cash flow.

Reduce Costs

An EPM suite can be costly, but considering all the data it brings together from various departments in real time, its value is immense. Using modular solutions with an open architecture gives you the same functionality, with the option to integrate desired applications. You can view the per-project budget allocation by connecting your budgeting and accounting systems with project management software.

Upscaling is easier with a single solution to learn. And automation drives efficient workflows, saving resources, money and time.

Accelerates Data Analysis

A centralized interface gives access to unique, accurate and reliable data with no risk of data duplication. Faster information retrieval translates to speedier data analysis. Collaboration is possible through shared real-time visualizations, team chats and comments. Having the latest data results at hand gives you confidence in your decisions.

Data science techniques like artificial intelligence and natural language processing help identify patterns in multi-departmental data. Knowing what’s working and what’s not can impact strategy restructuring and budgeting.

Improve Reporting and Planning

EPM software is an all-in-one budgeting, accounting and financial reporting system. It has built-in standard reports like income and cash flow statements that help you hit the ground running without IT help. Financial accounting software allows you to track expenses and earnings, oversee payroll management and keep tabs on goals and investments.

When you know your business inside out, you can pinpoint how to improve it. Business intelligence is still a part of most EPM offerings. Corporate planning is easier with a clear picture of your core operations with their strengths and weaknesses.

Boost Efficiency

Automating data aggregation saves time, letting you focus on performance analysis and planning. Cloud-based software allows you to stay informed and perform tasks remotely from any device. Create scripts to perform various tasks and automate their execution using a scheduler.

Besides scheduled uploads, administrators can automate reconciliation, profitability and cost management, and financial close and consolidation workflows. Others include data management, user provisioning and audit reporting.

Enhance Customer Service

Designed for your core operations, EPM provides robust back-end support to customer-facing processes. Companies perform better with seamless supply chain, inventory, and workforce management behind the scenes. EPM highlights improvement areas and top-performing KPIs, bringing to the fore your marketing, sales and customer processes for review and analysis.

Financial Performance Analysis

Performance analysis is the study of company financial statements —to discover a firm’s strengths and weaknesses. It also involves the comparative analysis of a company’s overall financial health. Company performance in a current fiscal year is compared to previous periods and competitors’ performance.

The different areas of financial performance analysis are as follows:

Profitability Analysis: Owners, managers, investors, shareholders, and creditors use profitability ratios. It helps determine a firm’s business performance and profit earning ability.

Working Capital Analysis: Analysts study firms’ operational efficiency to ensure that the firm does not run out of current assets—required to meet short-term obligations.

Activity Analysis: This comprises the evaluation of a company’s production process, human resource requirements, time taken, raw materials consumed, and value creation. Activity analyses are undertaken to boost productivity and to streamline business operations.

Financial Structure Analysis: The interpretation of the business capital structure is essential to balance the firm’s debt and equity proportion.

Indicators

The financial performance of any business can be gauged through various financial ratios that indicate a firm’s liquidity, profitability, leverage, and market value.

Prominent financial performance metrics are as follows:

1. Gross Profit Margin: The ratio determines firms’ profitability before considering the operating expenses. Its formula is as follows:

Ø Gross Profit Margin = [(Revenue – Cost of Goods Sold) / Revenue] × 100.

2. Net Profit Margin: The net profit ratio is another financial performance metric. It measures firms’ profitability after deducting all the expenses from gross profits. It is evaluated as follows:

Ø Net Profit Margin = (Net Profit / Revenue) × 100.

3. Return On Equity: It is a profitability measure that ascertains a firm’s ability to generate profit from equity capital that was acquired from the shareholders. It is represented by:

Ø Return on Equity = Net Profit / [(Beginning Equity + Ending Equity) / 2].

4. Return On Asset: This profitability ratio determines a firm’s ability to utilize assets efficiently to generate profits. Its formula is as follows:

Ø Return On Asset = Net Profit / [(Beginning Total Assets + Ending Total Assets) / 2].

5. Quick Ratio: It is a liquidity metric; it analyzes firms’ ability to clear short-term liabilities using cash and cash equivalents. Its formula is as follows:

Ø Quick Ratio = (Current Assets – Inventory) / Current Liabilities.

6. Current Ratio: It measures firms’ liquidity. It evaluates a firm’s ability to pay off short-term liabilities (using current assets). It is determined as follows:

Ø Current Ratio = Current Assets / Current Liabilities.

7. Working Capital: It gives an overview of a company’s operational liquidity—whether a firm is efficient in handling business operations. It is evaluated as follows:

Ø Working Capital = Current Assets – Current Liabilities.

8. Operating Cash Flow: Cash flow is a good indication of a firm’s financial performance. This ratio analyzes a company’s efficiency in maintaining a positive cash flow. This data can be acquired from companies’ cash flow statements—it can be positive or negative.

9. Debt Asset Ratio: It is a leverage ratio; it measures a firm’s ability to fulfill its short-term obligations, long-term obligations, and debts. This ratio considers companies’ overall assets as the criteria. It is computed as follows:

Ø Debt Asset Ratio = Total Debt / Total Assets.

10. Debt-To-Equity Ratio: It is a liquidity indicator; it is evaluated as the proportion of external liability to internal equity. It is computed as follows:

Ø Debt-to-Equity Ratio = Total Debt / Total Equity.

11. Equity Multiplier: It is a proportion of assets to shareholders’ equity. It indicates how much equity and debt was used to buy a particular asset. It is represented by:

Ø Leverage = Total Assets / Total Equity.

12. Total Asset Turnover: It measures the maximum net sales generated by a business when it employs all its assets. It is computed as follows:

Ø Total Asset Turnover = Net Sales / Total Sales.

13. Inventory Turnover: This ratio measures companies’ ability to convert stock into sales:

Ø Inventory Turnover = Cost of Inventory Sold / Average Inventory.

14. Accounts Receivable Turnover: It gauges firms’ efficiency in recovering outstanding credit (sales) from the debtors. It is evaluated as follows:

Ø Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivables.

15. Accounts Payable Turnover: This indicator evaluates a company’s ability to repay creditors (goods purchased on credit). It is calculated as follows:

Ø Accounts Payable Turnover = Net Credit Purchase / Average Accounts Payable.

Measures of financial performance reduce a large amount of information into a convenient form for analysis. No single measure of financial performance is adequate for evaluating a farm business. Evaluation of several financial measures may be more useful in directing the manager to ask the right questions than in providing solutions to the financial problems of the business. Both the magnitude of the measure and its relationship to other measures should be evaluated.

Decisions made in developing the balance sheet, cash flow statement, and income statement have important impacts on the financial measures discussed in this OSU Extension Fact Sheet. Some of those decisions include using cost or market values in preparing the balance sheet; determining a specific value for each asset and liability on the balance sheet; including or excluding accrued expenses, deferred taxes, and personal assets and liabilities from the balance sheet; estimating net income on a cash, accrual, or accrual adjusted basis; and deciding if income should be before or after taxes. Each of these decisions affects key relationships in the financial statements and impacts the financial measures used to evaluate financial performance and position.

Liquidity indicates the ability of the business to meet financial obligations when they come due. Timely payment of the obligations of the business, including principal and interest on debt without disrupting the normal operation, is an indication the business is liquid.

Solvency measures the ability of the firm to pay all debts if the assets of the business are sold. Generally, if the market value of total assets exceeds existing debt obligations against those assets, the business is solvent.

Profitability is an indication of the level of income produced by the farm business and is measured in terms of rates of return produced by the labor, management, and capital of the business.

Financial efficiency measures the degree of efficiency with which labor, management, and capital are used in the business. Efficiency indicates the relationship between inputs and outputs and can be measured in physical or financial terms.

Repayment capacity measures the ability of the business to repay existing debt commitments from farm and nonfarm income, and it is closely related to the concept of liquidity.

Each of these criteria plays an important role in the analysis of financial performance and position of a business, and each has alternative measures that are discussed in this OSU Fact Sheet.

How Does a Financial Controller Work?

A financial controller takes care of an organization’s basic and advanced financial activities. The person in charge plays a vital role in ensuring the records’ accuracy is maintained. Controllers in a corporate firm are hired to enhance the reliability of a business.

As a business grows, the cash inflows and outflows are more frequent. Hence, depending on bookkeepers for accurate records might be risky. Hiring a controller to track the frequent transactions and check the records for correctness becomes mandatory. These individuals ensure a company’s financial documents are up to the mark and reliable for auditors to validate and stakeholders to go through before making major decisions.

When a company records a revenue of over $5 million, it is expected to have a financial controller to control and supervise all basic and advanced financial activities. The controllers are well aware of the generally accepted accounting principles (GAAP) standards. Hence, they make sure the financial statements generated by the companies meet the requirements of investors and other stakeholders.

The controllers participate in all kinds of business activities involving financial expenditure. Besides the financial responsibilities handled, they also take care of the insurance, information technology, sales tax reporting, federal income tax reporting, human resources, and other functions. In addition, these professionals also ensure managing the internal controls so that the financial affairs are properly recorded and presented for further decision making of the internal and external stakeholders of the organizations.

Responsibilities

From the roles that the controller plays, their duties are quite clear. However, a set of financial controller responsibilities make their presence mandatory for any organization. Let us have a look at some of them:

Example

Let us consider the following example to understand the concept well:

A small-scale company appoints Robert as the financial controller, acting as the chief accounts officer. He has ten years of experience in accounting and finance, and he is a Certified Public Accountant (CPA).

As a controller, he is expected to manage all the finance and accounting functions, including generating income statements, cash flow statements, framing accounting policies, deciding the budget, etc. The company assigns him tasks to distribute among an allotted team of 10 executives. Robert joins the office and undertakes all tasks. He begins monitoring the company’s financial statements as prepared and other duties allocated to him.

Investors then use these financial statements to decide whether to invest in the company’s assets, and auditors utilize them to check and validate the cash inflows and outflows of the organization. In addition, he ensures getting timely information from those departments so that his department’s work runs smoothly.

Non-financial performance measure that aligns with churn and retention rates. Businesses typically measure customer experience by looking at all the business areas where a customer directly interacts with the company, such as a customer support team.

Significance of non-financial performance measures

Financial measures tend to focus on indicators that look into past performance, making them relatively easy to analyze. Despite this, they often lack context, such as why performance fell over a certain period. Non-financial performance measures help add context to this analysis. For example, if the marketing resources fall short in one quarter, the next quarter might experience a drop in sales. The other main reason why non-financial measures are crucial for businesses is that you can align them with certain parts of a business's strategy. It's unlikely for an organization to include a mission or vision statement that focuses on financial measures. Instead, they tend to align with things like best branding and this might be challenging to equate to fiscal indicators. Non-financial measurements, such as brand awareness figures, are much more useful in this regard.

Benefits of tracking non-financial performance measures

Although financial measures are usually vital for a company to be aware of to understand their performance, non-financial measures provide several benefits that help companies measure their performance with additional context and fidelity. Some of the main benefits associated with tracking non-financial performance measures include:

Determines strengths and weaknesses: By looking at these metrics, companies can gain a greater awareness of their strengths and weaknesses. For example, certain aspects of customer service, such as long hold times, are easier to identify by using non-financial performance measures.

Tracks business performance: One of the main benefits of using non-financial performance measures is that they help track business performance. For instance, if the HR team overspends, these metrics track this issue and may highlight high staff turnover rates as the cause.

Improves staff feedback: These measures are also a great way of guiding staff to achieve success and align with the business's overall strategy. By using these metrics, staff gain the opportunity to receive feedback that tells them what targets to meet to succeed in their roles.

Adjusts for external factors: Non-financial performance measures also consider external risks, such as market volatility or unforeseen global events. Due to this, using these metrics allow companies to gain a clear overview of their performance, with any external factors included in this outlook.

15 Examples of Non-Financial Performance Measures

Taking the Balanced Scorecard approach, there are four perspectives involved in strategy management: customer, internal processes (operations), learning and growth (HR), and financial. Below are 15 examples of performance KPIs, organized by the three non-financial perspectives:

Customers

Conversion Rate: The percentage of interactions that result in a sale. Formula: (Interactions with Completed Transactions) / (Total Sales Interactions) = (Conversion Rate)
Retention Rate: The portion of consumers who remain customers for an entire reporting period. Formula: (Customers Lost in a Given Period) / (Number of Customers at the Start of a Period) = (Customer Retention Rate)
Contact Volume By Channel: The number of support requests by phone and email. This allows the organization to not only compare which method customers prefer, but also to track the number of support requests month-to-month.
Customer Satisfaction Index: Gauge of a company’s success at meeting customers’ needs.
Net Promoter Score: The likelihood that customers will recommend a brand to others. A score from 1-10 that qualifies promoters (usually 9-10) and detractors (under 6).
Formula: (Number of Promoters) - (Number of Detractors) = (Net Promoter Score)
Customer Support Tickets: The number of new tickets, the number of resolved tickets, and resolution time.
Product Defect Percentage: This will give you the percentage of defective products in a specified timeframe. Formula: (Number of Defective Units in a Given Period) / (Total Number of Units Produced in a Given Period) = (Product Defect Percentage)
On-Time Rate: The percentage of time products were delivered promptly as scheduled. Formula: (Number of On-Time Units in a Given Period) / (Total Number of Units Shipped in a Given Period) = (On-Time Rate)
Efficiency Measure: Efficiency can be measured differently in every industry, so this common KPI will vary. For example, the manufacturing industry can measure efficiency by analyzing how many units are produced every hour and the plant’s uptime percentage.
Overdue Project Percentage: The number of projects that are late or behind schedule. This can be pulled from your project status dashboard. Formula: (Number of Overdue Projects in a Given Period) / (Total Number of Projects in a Given Period) = (Overdue Project Percentage)

Learning & Growth

Salary Competitiveness Ratio (SCR): The competitiveness of compensation options. Formula: (Average Company Salary) / (Average Salary Offered from Competitors (or Average Salary Offered by Industry)) = (SCR).
Employee Productivity Rate: Workforce efficiency measured over time. Formula: (Total Company Revenue) / (Total Number of Employees) = (Employee Productivity Rate).
Turnover Rate For Highest Performers: The success of retention efforts for top performers and plans for talent replacement. Formula: (Number of High Performers Who Departed in Past Year) / (Total High Performers Identified) = (High Performer Turnover Rate).
Average Time To Hire: The efficiency of the hiring process measured by time to recruit, interview, and hire.
Internal Promotion Rate: The successful retention and growth of top performers. (The Number of Promoted Individuals) / (Total Number of Employees) = (Internal Promotion Rate).

‍Remember to track the non-performance measures that best fit your organization’s needs. There are hundreds of KPIs to choose from—focus on the ones that make the most sense for your strategy.

Nonfinancial Performance Measures: The Balanced Scorecard

Question: Although financial measures are important for evaluation purposes, many organizations use a mix of financial and nonfinancial measures to evaluate performance. For example, airlines track on-time arrival percentages carefully, and delivery companies like Federal Express (FedEx) and United Parcel Service (UPS) monitor percentages of on-time deliveries. The balanced scorecard uses several alternative measures to evaluate performance. What is a balanced scorecard and how does it help companies to evaluate performance?

Answer: The balanced scorecard is a balanced set of measures that organizations use to motivate employees and evaluate performance. These measures are typically separated into four perspectives outlined in the following. (Dr. Robert S. Kaplan and Dr. David P. Norton created the balanced scorecard, and it is actively promoted through their company, Balanced Scorecard Collaborative.

Financial. Measures that shareholders, creditors, and other stakeholders use to evaluate financial performance.
Internal business process. Measures that management uses to evaluate efficiency of existing business processes.
Learning and growth. Measures that management uses to evaluate effectiveness of employee training.
Customer. Measures that management uses to evaluate whether the organization is meeting customer expectations.

The goal is to link these four perspectives to the company’s strategies and goals. For example, a high percentage of on-time arrivals is likely an important goal from the perspective of the customer of an airline. A high percentage of defect-free computer chips is likely an important goal from the internal business process perspective of a computer chip maker. A high number of continuing education hours is likely an important goal from the learning and growth perspective for tax personnel at an accounting firm. Measures from a financial perspective were covered earlier in this chapter.

Companies that use the balanced scorecard typically establish several measures for each perspective. "Balanced Scorecard Measures" lists several examples of these measures.

Table 13.4 Balanced Scorecard Measures

Financial	Internal Business Process	Learning and Growth	Customer
Gross margin ratio	Defect-free rate	Hours of employee training	Customer satisfaction (survey)
Return on assets	Customer response time	Employee satisfaction (survey)	Number of customer complaints
Receivables turnover	Capacity utilization	Employee turnover	Market share
Inventory turnover	New product development time	Number of employee accidents	Number of returned products

Measures established across the four perspectives of the balanced scorecard are linked in a way that motivates employees to achieve company goals. For example, if the company wants to increase the defect-free rate and reduce product returns, effective employee training and low employee turnover will help in achieving this goal. The idea is to establish company goals first, then create measures that motivate employees to reach company goals.

KEY TAKEAWAY

Most organizations use a mix of financial and nonfinancial measures to evaluate performance. The balanced scorecard approach uses a balanced set of measures separated into four perspectives—financial, internal business process, learning and growth, and customer. The last three perspectives tend to include nonfinancial measures, such as hours of employee training or number of customer complaints, to evaluate performance. The goal is to link financial and nonfinancial measures to the company’s strategies and goals.

REVIEW PROBLEM

Assume Chicken Deluxe, the fast-food restaurant franchise featured in this chapter, uses a balanced scorecard. Provide at least two examples of measures that Chicken Deluxe might use for each of the following perspectives of the balanced scorecard:

Financial

Internal business process

Learning and growth

Customer

Solution to Review Problem

Answers will vary. Several examples of financial measures are as follows:

Gross margin ratio

Profit margin ratio

Return on assets

Receivables turnover

Inventory turnover

Answers will vary. Several examples of internal business process measures are as follows:

Capacity utilization

Amount of food spoilage

Order response time

Answers will vary. Several examples of learning and growth measures are as follows:

Hours of employee training

Employee satisfaction

Employee turnover

Number of employee accidents

Answers will vary. Several examples of customer perspective measures are as follows:

Customer satisfaction

Number of customer complaints

Market share

Amount of food returned

Questions

1. Relevant Questions for Strategic Control

Is the premises created at the time of formulation of strategy proving to be correct?
Is the implementation of strategy is done properly?
Is there any requirement for change in the strategy? If the answer is yes, what sort of change is needed which guarantees strategic effectiveness?
Relevant Questions for Operational Control
How is the performance of the organization?
Are the resources of the organizations being utilized in an optimum manner?
What actions are required to be taken which confirm appropriate utilization of the resources so as to meet the objectives of the organization?

2. How to evaluate the financial performance of a company?

The following indicators are used to evaluate a firm’s performance:
1. Quick Ratio
2. Current Ratio
3. Working Capital
4. Gross Profit Margin
5. Net Profit Margin
6. Equity Multiplier
7. Debt-to-Equity Ratio
8. Return on Equity
9. Return on Asset
10. Total Asset Turnover
11. Inventory Turnover
12. Operating Cash Flow

How to improve the financial performance of a company?

A firm’s financial performance can be improved by implementing the following steps:
1. Sell off obsolete or unnecessary assets.
2. Improve cash inflows by speeding debt recovery.
3. Gradually reduce debts—to enhance debt-to-equity ratios.
4. Enhance profitability by eliminating unnecessary expenses.
5. Ensure proper inventory management—to reduce wastage.
6. Maintain sufficient working capital—for timely fulfillment of obligations.

Why is financial performance important for organizations?

Investors and shareholders go through the statement that depicts the firm’s financial performance. They ascertain a firm’s financial health and profitability before investing. In addition, business owners and managers use this analysis to improve the financial condition of a firm.

Questions

1. What is trend analysis? Explain how the percent change from one period to the next is calculated.

2. What is common-size analysis? How is common-size analysis information used?

3. Explain the difference between trend analysis and common-size analysis.

4. Name the ratios used to evaluate profitability. Explain what the statement “evaluate profitability” means.

5. Coca-Cola’s return on assets was 19.4 percent, and return on common shareholders’ equity was 41.7 percent. Briefly explain why these two percentages are different.

6. Coca-Cola had earnings per share of $5.12, and PepsiCo had earnings per share of $3.97. Is it accurate to conclude PepsiCo was more profitable? Explain your reasoning.

7. Name the ratios used to evaluate short-term liquidity. Explain what the statement “evaluate short-term liquidity” means.

8. Explain the difference between the current ratio and the quick ratio.

9. Coca-Cola had an inventory turnover ratio of 5.07 times (every 71.99 days), and PepsiCo had an inventory turnover ratio of 8.87 times (every 41.15 days). Which company had the best inventory turnover? Explain your reasoning.

10. Name the ratios used to evaluate long-term solvency. Explain what the term “long-term solvency” means.

11. Name the measures used to determine and evaluate the market value of a company. Briefly describe the meaning of each measure.

12. What is the balanced scorecard? Briefly describe the four perspectives of the balanced scorecard.

What is Transfer Pricing? Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control. For example, if a subsidiary company sells goods or renders services to its holding company or a sister company, the price charged is referred to as the transfer price

Example

Consider ABC Co., a U.S.-based pen company manufacturing pens at a cost of 10 cents each in the U.S. ABC Co.’s subsidiary in Canada, XYZ Co., sells the pens to Canadian customers at $1 per pen and spends 10 cents per pen on marketing and distribution. The group’s total profit amounts to 80 cents per pen.

Now, ABC Co. will charge a transfer price of between 20 cents and 80 cents per pen to its subsidiary. In the absence of transfer price regulations, ABC Co. will identify where tax rates are lowest and seek to put more profit in that country. Thus, if U.S. tax rates are higher than Canadian tax rates, the company is likely to assign the lowest possible transfer price to the sale of pens to XYZ Co.

Arm’s Length Principle

Article 9 of the OECD Model Tax Convention describes the rules for the Arm’s Length Principle. It states that transfer prices between two commonly controlled entities must be treated as if they are two independent entities, and therefore negotiate at arm’s length.

The Arm’s Length Principle is based on real markets and provides a single international standard of tax computation, which enables various governments to collect their share of taxes and at the same time creates enough provisions for MNCs to avoid double taxation.

Case Study: How Google Uses Transfer Pricing

Google runs a regional headquarters in Singapore and a subsidiary in Australia. The Australian subsidiary provides sales and marketing support services to users and Australian companies. The Australian subsidiary also provides research services to Google worldwide. In FY 2012-13, Google Australia earned around $46 million as profit on revenues of $358 million. The corporate tax payment was estimated at AU$7.1 million, after claiming a tax credit of $4.5 million.

When asked about why Google did not pay more taxes in Australia, Ms. Maile Carnegie, the former chief of Google Australia, replied that Singapore’s share in taxes was already paid in the country where they were headquartered. Google reported total tax payments of US $3.3 billion against revenues of $66 billion. The effective tax rates come to 19%, which is less than the statutory corporate tax rate of 35% in the US.

Benefits of Transfer Pricing

Transfer pricing helps in reducing duty costs by shipping goods into countries with high tariff rates by using low transfer prices so that the duty base of such transactions is lowered.

Reducing income and corporate taxes in high tax countries by overpricing goods that are transferred to countries with lower tax rates helps companies obtain higher profit margins.

Risks

There can be disagreements within the divisions of an organization regarding the policies on pricing and transfer.

Lots of additional costs are incurred in terms of time and manpower required in executing transfer prices and maintaining a proper accounting system to support them. Transfer pricing is a very complicated and time-consuming methodology.

It gets difficult to establish prices for intangible items such as services rendered, which are not sold externally.

Sellers and buyers perform different functions and, thus, assume different types of risks. For instance, the seller may refuse to provide a warranty for the product. But the price paid by the buyer would be affected by the difference.

The objective of a transfer pricing policy

The objective of transfer pricing policies is two-fold:

1. Harmony. Ensure that everyone in the firm is “on the same page” when it comes to the transfer pricing arrangements. Successful implementation of transfer pricing only works if there is “buy-in” from stakeholders. Before becoming reality, it needs to be understood.

Example I: The finance department wants to know what amounts to charge to which group entity (and when), the risk department wants to ensure that transfer pricing arrangements do not create risks, and the manager wants to know whether his/her financial results are affected.

2. Compliance. Demonstrate towards tax authorities that transfer pricing has been considered and implemented the right way. It shows a proactive attitude which is highly appreciated by tax authorities. It sets you apart from the crowd.

Example II: During a tax audit, tax authorities normally check whether compliance / documentation requirements are met. Besides showing the customary 100-page transfer pricing report, it is powerful if a MNE can show exactly how the transfer pricing arrangements have been implemented and are being complied with.

Example III: Added Value of a Transfer Pricing Policy

If you’re not convinced that a transfer pricing policy adds significant value to your transfer pricing strategy, please read the following example (based on a real case):

Teddy Transportation (a global distribution firm) has invested significant time and money in the preparation of a transfer pricing analysis and rock-solid documentation. Further, the required intercompany agreements are in place. In practice, not much follow-up has been done. Moreover, there is no (formal) transfer pricing policy. Teddy Transportation operates this way for a couple of years.

One day the tax authorities knock on the door. They inquire about the transfer pricing of Teddy Transportation. Teddy Transportation proudly shows them the rock-solid documentation and intercompany agreements. Next, the tax authorities check the books of various associated enterprises. They discover the following:

The finance department has issued invoices for Intercompany support services for amounts higher than they should be according to the transfer pricing documentation and intercompany agreements.

There are discrepancies between what is described in the transfer pricing documentation and the actual behavior of associated enterprises. For example, the documentation states that there are one Principal entity and several Low-Risk Distributor (LRD) entities. Under this model, the LRD entities do not assume much risk and do not get involved in marketing, price-setting, etc. In practice, however, the “LRD entities” are assuming (much) more risks and functions. They may very well be considered “Full-Fledged Distributors!”

Two group entities have concluded an intercompany loan that the tax department did not know of. Thus, it wasn’t included in any transfer pricing documentation.

Based on these findings, the tax authorities are not convinced that Teddy Transportation complies with transfer pricing rules. It starts an investigation to verify:

whether the allocation of risks, assets and functions on which the transfer pricing has been based is in line with reality (actual behavior)

whether there is transfer pricing documentation for all intercompany transactions.

The above could have been avoided if Teddy Transportation had clearly laid down the transfer pricing policies. Everyone should have had clarity on matters such as what amount to invoice, how to invoice, how to book the transactions, how to stay within the functionality borders of the Principal/LRD model, and who to inform when a new intercompany loan arrangement is put in place.

Unfortunately, Teddy Transportation now must spend time and money to address this. Resulting potentially in more taxes and penalties if the tax authorities decide to make adjustments to the transfer pricing…

How to prepare a Transfer Pricing Policy?

It goes beyond the scope of this article to discuss in detail what needs to be included in a transfer pricing policy, however, in general, we advise to include the following elements:

Transfer Price = Outlay Cost + Opportunity Cost
For example, consider a division that makes hats. The cost of making one hat is $2. That division can sell the hat in the marketplace for the market price of $5. Therefore, the opportunity cost of selling the hat internally instead of externally is $3. The transfer price would then be $5.
$5 = $2 + $3
In this simple example the transfer price is the same as the market price. In more complex examples this might not be the case. However, transfer prices are frequently based on or similar to market prices.

How does transfer pricing work?

Transfer pricing is a way of setting prices for transactions within a company or a group of companies under the same management or ownership. This applies to both international and domestic transactions. A transfer price is the amount that one division or subsidiary charges from another for a product or service they provide. Transfer prices are usually based on the market price for the product or service. Transfer pricing can also be used for research, patents, or royalties. Multinational companies can legally use transfer pricing to allocate their profits among their parent and subsidiary entities.

However, some companies may also use (or abuse) this method to manipulate their corporate income and lower their overall taxes. Transfer pricing helps companies to shift tax liabilities to low-tax jurisdictions.

Example of Transfer Pricing: ABC and CBD are both subsidiaries of XYZ's company. ABC manufactures cars and imports the engine from CBD. The price that ABC pays to CBD for the engine is the transfer price. Transfer pricing can affect the profitability and tax liability of each subsidiary and the parent company. If CBD charges a lower price, then the revenue of CBD will be lower; on the other hand, the cost of the car for ABC is lower, increasing the company’s profit. In short, Company CBD’s revenues are lower by the same amount as Company ABC’s cost savings—so there's no financial impact on the parent company.

Suppose company CBD operates in a higher tax rate country; XYZ can save taxes by making CBD less profitable and ABC more profitable. In other words, company CBD’s decision not to charge market pricing to company ABC allows the parent company to save taxes.

What are the methods of transfer pricing?

Section 92C(1) prescribed the methods of arm’s length, which are the followings:

CUP (Comparable Uncontrolled Price Method): This method compares the price charged in a controlled transaction (between related parties) with the price charged in a comparable uncontrolled transaction (between independent parties) under similar circumstances. It is price for identical or nearly identical property traded between the two independent parties under the same or similar circumstance. This method is favored when there is a high degree of comparability between the transactions and the markets.

Resale Price Method: This method compares the gross margin obtained by a reseller in a controlled transaction (between related parties) with the gross margin earned by a comparable reseller in an uncontrolled transaction (between independent parties) under similar circumstances. This method is suitable when the reseller/distributor does not add much value to the product and acts as an intermediary.

In this method the price at which the product or services are resold or provided to an unrelated party is identified. After adjusting gross profit margin and other expenses from resale value, the resulting amount is considered as arm length price.

Cost Plus Method: This method compares the mark-up on costs obtained by a supplier in a controlled transaction (between related parties) with the mark-up on costs earned by a comparable supplier in an uncontrolled transaction (between independent parties) under similar circumstances. This method is appropriate when the supplier provides goods or services that are not highly customized or complex and does not assume significant risks.

Profit Split Method: This method allocates the combined profit or loss from a controlled transaction (between related parties) among the participants based on their relative contributions to the value creation. This method is applicable when the participants are highly integrated and interdependent and share significant risks and intangible assets.

(TNMM) Transactional Net Margin Method: This method compares the net profit margin earned by a tested party in a controlled transaction (between related parties) with the net profit margin earned by a comparable party in an uncontrolled transaction (between independent parties) under similar circumstances. This method is useful when comparability is needed at the transaction level or when multiple transactions must be aggregated

What do you mean by capital expenditure control?

Periodical totals of the capital expenditures incurred are made in the Capital Expenditure Project Sheet to have a continuous control over expenditure. The progress of the expenditure incurred on a project is reported from time to time to the management through Capital Expenditure Progress Statement.

Objectives of Control of Capital Expenditure:

The following are the main objectives of control of capital expenditure:

(1) To make an estimate of capital expenditure and to see that the total cash outlay is within the financial resources of the enterprise.

(2) To ensure timely cash inflows for the projects so that non-availability of cash may not be a problem in the implementation of the project.

(3) To ensure that all capital expenditure is properly sanctioned.

(4) To properly co-ordinate the projects of various departments.

(5) To fix priorities among various projects and ensure their follow up.

(6) To compare periodically actual expenditures with the budgeted or.es so as to avoid any excess expenditure.

(7) To measure the performance of the project.

(8) To ensure that sufficient amount of capital expenditure is incurred to keep pace with the rapid technological developments.

(9) To prevent over-expansion.

Steps Involved in the Control of Capital Expenditure:

The various steps involved in the control of capital expenditure are:

(a) Preparation of capital expenditure budget.

(b) Proper authorization of capital expenditure.

(d) Evaluation of performance of the project.

(a) Preparation of Capital Expenditure Budget:

The first step in the control of capital expenditure is to prepare a capital expenditure budget. The budget lays down the amount of estimated expenditure to be incurred on fixed assets during the budget period. As the amount involved in capital expenditure is usually high this requires careful attention of the top management.

The budget is based upon the annual forecasts of capital expenditure of various divisions or departments. Each division or department of an organisation sends the annual forecast of capital expenditure of its own department to Capital Expenditure Sanction Committee. The Committee after considering the profitability of the capital expenditure sanctions the expenditure and then the amount is incorporated in the budget.

(b) Proper Authorization of Capital Expenditure:

Preparation of a capital expenditure budget and incorporation of a particular project in the budget does not itself authorize to go ahead with the implementation of the project. A request for authority to spend the amount should further be made to the Capital Expenditure Committee which may like to review the profitability of the project in the changed circumstances to see:

(a) Whether the project is as good as when budgeted?

(b) Whether funds are available as budgeted? and

After making a fresh review, the Committee approves the expenditure. Projects involving only small amounts of expenditure may be approved by a senior manager without referring to the Committee.

Once a capital expenditure is duly sanctioned, a proper record of the capital expenditure has to be made. The record of the capital expenditure is made on the basis of the information contained in the Capital Expenditure Request and Sanction Form. A Capital Project Sheet serially numbered is used for this purpose and all the details of the sanctioned project are written up in the Project Sheet.

Each capital expenditure project is assigned a number to distinguish it from other projects. All expenditure incurred is recorded in the project sheet at regular intervals. (A specimen of the Capital Expenditure Project Sheet is given). The various external costs are recorded from material requisition notes, time sheets or labour cards and overhead recovery statements.

In case any project is likely to exceed the authorized expenditure, then supplementary sanction should be obtained. It must be seen that no expenditure is incurred over and above the sanctioned amount. Capital Expenditure Progress Statements help in taking timely decisions before it is too late to correct them.

(d) Evaluation of the Performance of the Project:

The last stage in the control of the capital expenditure is the evaluation of the performance of the project. This evaluation is made through post completion audit which provides comparison of the actual expenditure incurred on the project with the budgeted or estimated expenditure.

The post completion audit should be carried by a team of experts who are independent of those who originated the projects. Such an evaluation of the performance of the project helps in developing the capital expenditure policy and planning for future.

Lastly an overall check is made by calculating the return from investment to see whether the project yields the anticipated return or not. In case a project fails to give the anticipated return on investment the causes for the variance should be found out so that corrective action may be taken for the future.

Tools & Techniques of Capital Expenditure Control

What are the Tools & Techniques of Capital Expenditure Control ?

The 4 tools & techniques of capital expenditure control are describes as follows :

Ø Performance Index

Ø Technical Performance Measurement (TPM)

Ø Post Completion Audit

Ø Earned Value Method

Performance Index

Often it is necessary to present information from several related areas simultaneously. This is done to provide a statistical measure of how performance changes over time. The performance index is a management tool that allows multiple sets of information to be compiled into an overall measure. The two Performance Indexes in the project cost management. These indexes are :

Schedule Performance Index (SPI)

The Schedule Performance Index is the ratio of total original authorized duration versus total final project duration. The ability to accurately forecast schedule helps meet time-to-market windows. SPI Standard Deviation is an even better metric that shows the accuracy of schedule estimating. The Schedule Performance Index tells us about the efficiency of time utilized on the project. It is a measure of progress achieved compared to the planned progress.

Schedule Performance Index = (Earned Value)/(Planned Value)

SPI = EV/PV

The Schedule Performance Index informs us how efficiently we are actually progressing compared to the planned progress.

Note:

If Schedule Performance Index (SPI) is greater than one, this means more work has been completed than the planned work.

If SPI is less than one, this means less work is completed than the planned work.

If SPI is equal to one, this means the work completed is equal to the planned work.

Cost Performance Index (CPI)

The Cost Performance Index is a measure of cost efficiency. It's determined by dividing the value of the work actually performed (the earned value) by the actual costs that it took to accomplish the earned value. The ability to accurately forecast cost performance allows organizations to confidently allocate capital, reducing financial risk, possibly reducing the cost of capital. CPI Standard Deviation is an even better metric, one that shows the accuracy of budget estimating. The Cost Performance Index tells us about the efficiency of the cost utilized on the project. It is the measure of the value of the work completed compared to the actual cost spent on the project.

Cost Performance Index = (Earned Value)/(Actual Cost)

CPI = EV/AC

The Cost Performance Index informs us how much we are earning for each dollar spent on the project.

Note :

If Cost Performance Index (CPI) is less than one, this means we are earning less than the spending.

If CPI is greater than one, this means we are earning more than the spending.

If CPI is equal to one, this means earning and spending is equal.

Performance Evaluation Parameters for Banks:

Sound financial health of a bank is the guarantee not only to its depositors but is equally significant for the shareholders, employees and whole economy as well. As a sequel to this maxim, efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively. With the integration of Indian financial sector with the rest of the world, the concept of banks and banking has undergone a paradigm shift.

A) Customer Base: Client relationship, getting back to basics, customer centric culture etc., are some of the buzzwords in the present-day banking universe. Banks today is going out of their way to get closer to the customer and align their product & service offerings to best match the customer needs.

a) Meaning: A customer base is a group of customers who could be served by a business. Many people define this term as only the consumers who already patronize a business, but others include any consumer with certain purchasing characteristics in this category, even if that customer has yet to be convinced to enter the store or take advantage of a product. Within the larger group is a smaller subset of the customer base that is made up of loyal shoppers, also called repeat customers.

Examples of Banking Performance Reviews

Example 1

John Doe is a senior banker with four years of experience in his current role. He consistently provides excellent customer service and profoundly understands the organization’s products and services. He is proactive in finding solutions for customers and often takes the initiative to solve complex problems.

In addition, John has been instrumental in developing process improvements that have improved efficiency across the department. Overall, it has been a pleasure working with John; he is an asset to our team.

Example 2

Jane Smith is a junior banker who has been with the organization for one year. She shows great potential but still needs improvement in some areas. She demonstrates good communication skills but could benefit from additional financial regulations and processes training.

Jane is also very organized and has the potential to take on larger projects with more responsibility. With some extra guidance and support, she should be able to reach her full potential.

Example 3

Carl Johnson is a mid-level banker with five years of experience in his current role. He has been a great asset to the team. He is always willing to help out when needed and brings great ideas to the table.

Carl’s financial knowledge is excellent, but he could use additional training in customer service skills. He also needs to improve his time management skills and focus on completing tasks within deadlines. With further development, Carl can become an even more significant asset to our organization.

Top 10 Banking Performance Comments

1. “You have excellent customer service skills and always take initiative to help customers find the best solutions for their needs.”

2. “Your financial knowledge is impressive, and you understand all of the organization’s products and services.”

3. “You are able to collaborate with colleagues and contribute valuable ideas to our team discussions.”

4. “You show great organizational skills when managing projects or tasks.”

5. “You have a keen understanding of banking regulations and remain compliant at all times.”

6. “Your time management skills have improved over the past year, and you consistently meet deadlines on time.”

7. “You have a natural ability to think on your feet and quickly adapt in challenging situations.”

8. “You continually demonstrate that you are willing to take on larger projects with more responsibility.”

9. “Your attitude is always positive, and you remain professional in all interactions with customers or clients.”

10. “You are eager to learn new methods, technologies, or processes which will help strengthen our organization over time.”

Conclusion

Performance reviews are an essential part of any banking job, allowing employees to showcase their achievements and identify areas for improvement. You can understand common banking performance review examples.

Following our tips on making the most of this experience, you can ensure that you get the best out of every performance review. With proper preparation and a positive attitude, banking performance reviews can become valuable in helping you reach your goals.

Retail KPIs, goals, and measures of success

The first step in creating retail KPIs is to define your business objectives, which can include the growth of your teams, locations, online revenue, and more. The next step is to create strategies to reach those objectives, and track the results of those strategies (metrics). KPIs should always ladder up to strategies that meet a business objective. Your business may use all or just a combination of the following metrics:

Ø Sales per square foot

Ø Gross margins return on investment

Ø Average transaction value

Ø Customer retention

Ø Conversion rate

Ø Foot traffic and digital traffic

Ø Inventory turnover

The most common indicator of growth in retail is the sales volume. If you’re selling more, then you’re growing. However, growth encompasses more than just the number of sales, it also involves improving your processes. Improved processes can mean becoming efficient in reaching more customers, improving employee morale, and cost-effectively expanding or shrinking your inventory. In the end, those will translate to more sales and better business growth. Below are some of the most common retail KPIs to measure success.

Sales per square foot

Formula: Total net sales / Total square foot Sales per square foot is a compelling metric if you have a physical retail space. Sales per square foot measures how effectively you’re using the area you have, and sales per square inch is a good indicator of your store’s productivity while offering insights into store and merchandise layouts. You can visualize these insights with heat maps of your locations and dig into the data to determine why some merchandise performs better than others. If one section is performing better than another, it may be due to the types of products or their arrangement. When you see how the store layout is performing, then you can improve it and improve sales results. In practice, research in this area has found that products at eye level are more popular than products higher or lower on shelves. And retailers often place smaller consumable items by the register to encourage last-minute purchases. Retailers uncover these insights by sales by digging in and getting curious about square foot metrics.

Gross margins return on investment (GMROI)

Formula: Total gross profit / Average inventory cost While this one sounds similar in name to the baseline gross profits metric, its purpose is a bit different. GMROI measures the profit you make from the amount you invest in product stock. What this means in practice is that for every dollar you spend in your inventory, this KPI can tell you how many dollars you get back. Return on investment is vital to track for a couple of reasons. It offers more nuance than just sales or profit margins. GMROI generally tracks specific products or categories rather than inventory as a whole. Its specificity can tell you what is worth carrying in your stock and what is not, as well as what you could invest further in. The more you make on each profit margin, the better your retail business does as a whole. Growth comes when you find products worth investing in and have a good return on their initial costs.

What Is ABC Analysis in Inventory Management?

ABC analysis is an inventory management technique that determines the value of inventory items based on their importance to the business. ABC ranks items on demand, cost and risk data, and inventory mangers group items into classes based on those criteria. This helps business leaders understand which products or services are most critical to the financial success of their organization.

The most important stock keeping units (SKUs), based on either sales volume or profitability, are “Class A” items, the next-most important are Class B and the least important are Class C. Some companies may choose a classification system that breaks products into more than just those three groups (A-F, for example).

ABC analysis in cost accounting, or activity-based costing, is loosely related but different from ABC analysis for inventory management. Accountants use activity-based costing in manufacturing to assign indirect or overhead costs like utilities or salaries to products and services.

How Is ABC Inventory Analysis Calculated?

Conduct ABC inventory analysis by multiplying the annual sales of a certain item by its cost. The results tell you which goods are high priority and which yield a low profit, so you know where to focus human and capital resources.

Use this formula for ABC inventory analysis:

(Annual number of items sold) x (Cost per item) = (Annual usage value per product)

You can use Microsoft Excel to do a basic ABC inventory analysis. List each product or resource in descending order according to its product usage value. Calculate the total of each item in the aggregate amount. Determine the values for the A, B and C categories, then assign a group name to each item. The goods with the highest value then get the manager's closest attention.

Example of an ABC Analysis Calculation

Below is an example of an ABC analysis of inventory for a small retail business that shows the Pareto Principle at work, with many lower volume products also among the highest-value ones. The resulting Pareto Diagram shows the characteristic curve that illustrates the 80/20 rule, where items rank and roughly where to drop them into A, B or C classifications.

For more information about benefits and best practices, check out our inventory management guide.

How ABC Analysis Simplifies Work for Inventory Managers

Inventory managers are always looking for ways to improve pricing and quality or to achieve greater efficiencies. In light of that goal, they may use the ABC technique, sometimes called the “always better control” method. They can use the analysis to focus their time and effort primarily on Class A inventory and less on B and C class products. For example, inventory managers will use ABC analysis to check the purchase orders of the highest value (Class A items) products first, since these generate the most revenue.

Why Use ABC Analysis?

Using ABC analysis for inventory helps better control working capital costs. The information gained from the analysis reduces obsolete inventory and can boost the inventory turnover rate, or how often a business has to replace items after selling through them.

ABC Analysis Benefits

A long list of benefits can result from applying ABC analysis to inventory management, including:

Increased Inventory Optimization: The analysis identifies the products that are in demand. A company can then use its precious warehouse space to adequately stock those goods and maintain lower stock levels for Class B or C items.
Improved Inventory Forecasting: Monitoring and collecting data about products that have high customer demand can increase the accuracy of sales forecasting. Managers can use this information to set inventory levels and prices to increase overall revenue for the company.
Better Pricing: A surge in sales for a specific item implies demand is increasing and a price increase may be reasonable, which improves profitability.
Informed Supplier Negotiations: Since companies earn 70% to 80% of their revenue on Class A items, it makes sense to negotiate better terms with suppliers for those items. If the supplier will not agree to lower costs, try negotiating post-purchase services, down payment reductions, free shipping or other cost savings.
Strategic Resource Allocation: ABC analysis is a way to continuously evaluate resource allocation to ensure that Class A items align with customer demand. When demand lowers, reclassify the item to make better use of personnel, time and space for the new Class A products.
Better Customer Service: Service levels depend on many factors, like quantity sold, item cost and profit margins. Once you determine the most profitable items, offer higher service levels for those items.
Better Product Life Cycle Management: Insights into where a product is in its life cycle (launch, growth, maturity or decline) are critical for forecasting demand and stocking inventory levels appropriately.
Control Over High-Cost Items: Class A inventory is closely tied to a company’s success. Prioritize monitoring demand and maintaining healthy stock levels, so there’s always enough of the key products on hand.
Sensible Stock Turnover Rate: Maintain the stock turnover rate at appropriate levels through methodical inventory control and data capture.
Reduced Storage Expenses: By carrying the correct proportion of stock based on A, B or C classes, you can reduce the inventory carrying costs that come with holding excess inventory.
Simplified Supply Chain Management: Use an ABC analysis of inventory data to determine if it’s time to consolidate suppliers or shift to a single source to reduce carrying costs and simplify operations.

What is GMROI?

GMROI stands for Gross Margin Return on Investment (aka. Gross Margin Return on Inventory Investment). It is used to measure the amount returned on every dollar invested in inventory.

For example, if GMROI= 3 it means that for every dollar invested on inventory the return is 3$.

What Is the Gross Margin Return on Investment (GMROI)?

The gross margin return on investment (GMROI) is an inventory profitability evaluation ratio that analyzes a firm's ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost and is used often in the retail industry. GMROI is also known as the gross margin return on inventory investment (GMROII).

KEY TAKEAWAYS

The GMROI shows how much profit inventory sales produce after covering inventory costs.

A higher GMROI is generally better, as it means each unit of inventory is generating a higher profit.

The GMROI can show substantial variance depending on market segmentation, the period, type of item, and other factors.

Understanding the Gross Margin Return on Investment (GMROI)

The GMROI is a useful measure as it helps the investor or manager see the average amount that the inventory returns above its cost. A ratio higher than one means the firm is selling the merchandise for more than what it costs the firm to acquire it and shows that the business has a good balance between its sales, margin, and cost of inventory.

The opposite is true for a ratio below 1. Some sources recommend the rule of thumb for GMROI in a retail store to be 3.2 or higher so that all occupancy and employee costs and profits are covered.

How to Calculate the Gross Margin Return on Investment (GMROI)

To calculate the gross margin return on inventory, two metrics must be known: the gross margin and the average inventory. The gross profit is calculated by subtracting a company's cost of goods sold (COGS) from its revenue. The difference is then divided by its revenue. The average inventory is calculated by summing the ending inventory over a specified period and then dividing the sum by the number of periods while considering the obsolete inventory portion scenarios as well.

How to Use the Gross Margin Return on Investment (GMROI)

For example, assume luxury retail company ABC has a total revenue of $100 million and COGS of $35 million at the end of the current fiscal year. Therefore, the company has a gross margin of 65%, which means it retains 65 cents for each dollar of revenue it has generated.

The gross margin may also be stated in dollar terms rather than in percentage terms. At the end of the fiscal year, the company has an average inventory cost of $20 million. This firm's GMROI is 3.25, or $65 million / $20 million, which means it earns revenues of 325% of costs. Company ABC is thus selling the merchandise for more than a $3.25 markup for each dollar spent on inventory.

Assume luxury retail company XYZ is a competitor to company ABC and has total revenue of $80 million and COGS of $65 million. Consequently, the company has a gross margin of $15 million, or 18.75 cents for each dollar of revenue it has generated.

The company has an average inventory cost of $20 million. Company XYZ has a GMROI of 0.75, or $15 million/ $20 million. It thus earns revenues of 75% of its costs and is getting $0.75 in gross margin for every dollar invested in inventory.

This means that company XYZ is making only $0.75 cents for each $1 spent on inventory, which is not enough to cover business expenses other than inventory such as selling, general, and administrative expense (SG&A), marketing, and sales. For that XYZ margins are sub-standard. In comparison to company XYZ, Company ABC may be a more ideal investment based on the GMROI.

How to Calculate GMROI

GMROI – Gross Margin Return on Inventory Investment – indicates how much gross margin you get back for each dollar “invested” in inventory over a year. Through careful analysis, you can see which lines, departments or categories are the most rewarding for your inventory investment. And which are least productive!

Here’s the formula for calculating GMROI: (Use annual numbers; also, “Gross Margin” is sometimes called “Gross Profit”)

GMROI = Gross Margin $$ divided by Average Inventory @Cost

For example, consider this merchandise category with annual sales of $130,000 at a Gross Margin (or Gross Profit) of 49%

Gross Margin $$ = $63,700 • Average Inventory @Cost = $40,625

GMROI = $63,700 / $40,625 = $1.57

What does this mean?

In everyday language, it means that this retailer is getting back $1.57 in gross margin for every $1.00 invested in inventory in this category for the year.

This is a great tool! But, it becomes really powerful once you are able to compare this category to the others in your store, and/or to last year.

he Power of GMROI: Compare and Contrast!

Consider this example. Which of these four departments is the most productive?

Well, let's see.

Department A has the highest sales (Gotta love a great top line!)

Departments B and C have similar sales.

But C has the highest margin.

So, we repeat: Which department is the "best" for this retailer?

Careful. That can be answered only after we calculate the GMROI.

Here are the GMROI calculations for each of these four departments. Revealing, isn't it?

Department D – admit it, sometimes overlooked because it has the lowest sales and margin – is the productivity winner! It has the highest GMROI. Its lower margin is offset by its higher inventory turns.

One key takeaway to keep in mind: Sales and margin alone can’t really tell the whole story.

Prefer a "Down 'n Dirty" GMROI Formula?

Just find the Gross Margin Dollars (of a department) for one full week. Then multiply it by 52 weeks, and complete the calculation by dividing your current on-hand inventory at cost into the "annualized" figure for Gross Margin Dollars.

A Practical Guide to Performance Management for Nonprofits

Performance management for non-profits looks a little different. Employees live by certain values, work for the greater good, and aren’t measured on profits. HR departments at non-profits may struggle to run a traditional performance management system.

A Bridgespan Group survey showed that two-thirds of nonprofit organizations think performance assessment is a weakness. If you look at all companies— for-profit and non-profit —less than half say their performance management system needs work.

So, why do nonprofits struggle with performance management more than for-profit businesses?

Nonprofits have unique challenges. Many nonprofits have small HR departments. These small departments have little time to build a performance management process. Measuring employees’ performance can be difficult when profits aren’t the main goal.

Though performance management for nonprofits may be challenging, it isn’t impossible. All you have to do is apply an approach that works for you.

Below, you’ll find steps you can take to design a nonprofit performance evaluation for your team. You can also see real-life examples of how other nonprofits approach performance management. These examples can guide you when you’re designing your performance management system.

The right software makes it easy for small HR teams to run performance reviews. Learn More

Dr.Bharti P Jagdale

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EPM Notes - Part 1

Enterprise Performance Management (EPM)

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