EPM Notes - Part 2

Steps for Designing a Nonprofit Performance Management Process

An HR person at a non-profit can get into trouble if they think of the performance management process as a whole. It’s easy to feel overwhelmed. Breaking it down into individual steps will help you tackle the process more quickly. 

The three steps for designing a nonprofit performance management process include:

Ø  Align your goals with your mission

Ø  Use a continuous performance management process

Ø  Use software tools to streamline the process as much as possible

1. Align your goals with your mission

There’s no need to reevaluate your mission to create a nonprofit performance evaluation. Your performance review process should align with your mission.

First, dig deep into your company's core values. Then, determine where you want to be. Compare that to your current values and see if they support your vision. If the answer is yes, they can be used in your review process.

Here’s an example. Let’s say positivity is essential to your organization. You can measure employee performance by observing if they show:

An openness to identify solutions when presented with problems

The drive to find progress every day

An encouraging attitude towards colleagues who are facing obstacles

Just be careful not to go overboard! Focus on the least amount of values that enable you to achieve your vision. This will prevent your evaluation process from getting too clunky. You can use PerformYard to streamline the goal process, as seen below:

See goals alongside reviews with PerformYard software.Learn More

2. Use a continuous performance management process

Let’s say you’re trying to find the quickest version of a nonprofit organization's performance evaluation process. You like the idea of an annual review because it sounds like it would take less time than a continuous performance management process. The truth is, a process with frequent touch points throughout the year is easier—and less time-consuming. 

It’s what your employees probably want too. 80% of employees prefer immediate feedback rather than waiting for an annual performance review.

Continuous performance management means both employees and managers talk about performance frequently. Reviews can be scheduled weekly, monthly, or biannually. You can create a schedule of informal check-ins or conduct project-based reviews every time the team completes a project. Discussions may include goals, celebrating wins, and how to improve performance. 

This type of performance management for nonprofits doesn’t force you to tie annual reviews to everyone’s work anniversary. HR doesn’t have to set aside huge chunks of time when annual reviews come around. Instead, you work continuous feedback into your weekly schedule. Continuous feedback is a popular feature within the Perform Yard performance management platform. Using it helps employees get the frequent feedback they want.

Learn why nonprofits like Habitat for Humanity use Perform Yard. Learn More

Well-built programs are fully automated. That means HR people can minimize the amount of time they spend on the performance management process. Even the smallest HR departments can run a continuous performance review process with frequent checkpoints and continuous feedback. You say what you want to measure, how to measure it, and how often, and the program does the rest.

Examples of Non-Profits Excelling in Performance Management

Let’s see some real nonprofit organization performance evaluation systems in action. These examples show you a clear path forward with your performance management process.

Here are a few examples of nonprofits excelling at performance management:

How Habitat for Humanity built a culture of accountability

How NAMI created more qualitative discussions with employees

How the Colorado Health Foundation modernized performance reviews

How Habitat for Humanity built a culture of accountability

Habitat for Humanity started with an annual review, which is where many nonprofits start. Those reviews included a self-evaluation and a downward review.

As the organization grew, the average review totaled nine pages. These reviews had wildly different feedback from different managers. The reviews included files that would just sit in a drawer until the next annual review. It was time for a change.

Kathy is the Director of Human Resources at Habitat for Humanity Philadelphia. She was introduced to the idea of a standalone performance management platform. Shortly after, she slowly began the process of transitioning.

In the first year, they kept their standard review forms and focused on getting employees comfortable with PerformYard. In the second year, they added a mid-year review to keep everyone accountable for the process.

They also simplified their forms based on their organization's core values. In their fourth year, 360 reviews were introduced. They also expanded access to PerformYard to include part-time employees.

Ø  e-commence performance

Ecommerce Metrics to Track?

Revenue and sales, you’d say. That’s right, of course, but those two metrics don’t say much about how your business is actually doing and what its financial health is. 

You can be selling a lot without making any profit. Or you could be getting thousands of new customers a day at an excruciating price. Or maybe those thousands of people never come back to shop for more. In all of these cases, you’d have good revenue and a high number of sales figures, but unstable business. 

That’s why every online store should measure and track the following key performance indicators (KPIs) to make sure all’s running smoothly beneath the surface:

• Conversion rate
• Customer acquisition cost
• Average order value
• Average profit margin
• Cart abandonment rate
• Customer lifetime value
• Retention rate and share of repeat customers
• Refund and return rate
• Best performing products and categories
• Email performance metrics

 A note on vanity metrics: social media engagement, website traffic, and pageviews

 Performance is an essential factor that can be used to assess any retail business, particularly if it involves e-commerce transactions. It can be difficult to get an accurate measure of how an e-commerce business is faring if its performance isn’t gauged and studied.

Regardless of the niche or branch of e-commerce your business belongs to, it is important that you continuously monitor its performance so as to know the exact state it is in. This can be done by measuring certain parameters that have been proven to be highly reliable metrics.

These parameters are referred to as performance indicators. Every business has a unique structure with peculiar goals and objectives. It is also worthy to note that the performance indicators that are established for a particular e-commerce business may be inappropriate for another. This is largely due to the fact that e-commerce websites vary in niches, modes of operations, and objectives.

What is a Performance Indicator?

A performance indicator can be described as a measurable parameter that is used to calculate and substantiate the performance of a business entity in relation to its set goals. To dilute this definition for a layman, a performance indicator simply means a measurement of a business’ performance in relation to its set target.

So for instance, if a website sets a target of 10,000 monthly views by the end of its first year, a performance indicator that can be used to measure its performance so far is the number of unique visitors that visit the site daily.

Basically, any parameter that helps to show the performance level of an e-commerce business can be regarded as a performance indicator. There are, however, some performance indicators that are key to the overall success of an e-commerce website; these parameters are referred to as key performance indicators.

What is a key performance indicator?

Almost any parameter can be used as a performance indicator to measure the success rate of an e-commerce platform. This, however, makes a lot of artificially created metrics less trustworthy since they aren’t universally accepted as true measurements for performance. The data that is also assembled from them can’t also be regarded as factual.

KPIs are, however, globally recognized as true indicators of business performance. They are quite accurate since the parameters used in calculating them exist in all facets of business and a variety of e-commerce niches.

Why are key performance indicators important?

When you’re running a business, it is important that you consistently monitor the status of your enterprise…be it structurally, functionally, and financially. It is just erroneous for a business entity, particularly an e-commerce website, to remain functional without consistent assessment of its “health”.

It is quite crucial that you know how your online retail store is faring otherwise it may begin to fail without your knowledge.

KPIs are collections of factual data that show you the real state of your business. They are not formulated by guess-work but are in fact pulled from actual studies of growth parameters associated with your e-commerce website.

The principal function of KPIs may be to inform you of your business’ status, but they also play pivotal roles in providing you with actionable information that you can use to improve your business’ performance.

On their own, KPIs are pretty much ineffective in growing an e-commerce business. When the collected data is, however, used strategically to implement multiple growth strategies, it can have a very positive effect on the e-commerce platform and improve sales by a large margin.

Another important use of KPIs is the training of personnel. With the knowledge of employees expanded, they can act purposefully to help improve the performance of the online store.

There are different categories of KPI, but only 2 are essential for the analysis of an e-commerce website:  Sales and Marketing.

Key Performance Indicators for Sales

KPIs for sales are perhaps the most important performance indicators for e-commerce businesses since they directly measure funds coming in via commercial transactions. While some of these parameters barely scrape the surface of sales data, others delve into details and help e-commerce businesses pinpoint parts of their operations that are adversely affecting their sales.

Here are some KPIs for sales you should always look out for.

Sales

It is possible for you to monitor hourly, daily, weekly, monthly, and yearly sales on your e-commerce website. With the information that is retrieved from this KPI, you can accurately know if your sales target is being met.

Gross Profit

The fact that your e-commerce business is making sales doesn’t necessarily mean that it is turning a profit and actually making money for you. To know if your online store is profitable, you must calculate the gross profit, which is the total sales minus the costs of the sold goods.

The Average Order Size

This parameter specifically measures the amount spent on each order by a customer. It is also referred to as average market basket, and it helps you to know which of your customers are able to afford the products you sell.

Average Profit Margin

This is the percentage profit margin of an e-commerce business over a specific time period. It is often just called the average margin and gives a clearer view of your business’ revenue status.

Conversion Rate

The internet users who visit your online store only become active players in your e-commerce business when they have been converted to paying customers. The rate at which this happens is referred to as conversion rate, and it is an important KPI that tells you whether your marketing strategy is working.

If your e-commerce platform is getting decent traffic but still struggling with its conversion rate, then it means that you need to make use of another approach with regards to your marketing strategy.

Number of Transactions

It is important that you consistently keep tabs on the number of transactions being carried out on your website. Using this KPI together with the average order size gives more insights into the purchasing behavior of your customers.

Cart Abandonment Rate

This indicator basically measures the rate at which visitors who add products to carts abandon them before completing the checking out process. It is an important parameter that helps you to know if your checking out process needs to be overhauled for a smoother process.

 

 

Customer Orders — New vs Returning

Customer retention is quite critical to the success of an e-commerce site, and its measure can be determined by comparing the number of new customer orders to that of returning customers. If the customer retention of your site is solid, it is bound to grow further and make a lot more profit.

Cost of Goods Sold

Also referred to as COGS for short, this KPI tells you the cost incurred on each product that is sold on your e-commerce platform. The indicator is composed of important elements that go into the production of a commercial item including wages, manufacturing costs, and overhead costs.

Available Market Share vs Retailer’s Market Share

This KPI lets you know how your business is doing by comparing the market you presently control to that still available.

Product Affinity

This isn’t your conventional performance indicator. It basically informs you of products that are often purchased together. Having this knowledge allows you to streamline your marketing strategy for such products.

Product Relationship

This KPI is used to study the products that are consecutively viewed and purchased. It also helps you to define a marketing strategy for your e-commerce site.

Inventory Levels

Information about the inventory of your e-commerce site is quite important since it lets you know the stock you have at hand and provides useful data on the products you sell. Among such information is the number of days each product has spent in your inventory.

Competitive Pricing

A consistent review of pricing policy is a must if you want your e-commerce business to thrive in the midst of its competitors. To do this, you must analyse your prices and place them side by side with your competitors’.

Customer Lifetime Value

This KPI tries to measure the worth of a customer to your business and basically lets you know the loyalty levels of all your customers.

Revenue Per Visitor

Remember that the amount spent by each customer on your website varies, which is why it is necessary to keep records of the revenue that comes in from each customer you sell to on your platform. RPV helps you to address this and gives you a clear picture of the customers that still need to be subjected to a marketing campaign.

Churn Rate

This is an indicator that determines if your e-commerce business is failing. It basically informs you of the rate at which customers are cancelling orders and switching to another brand.

Customer Acquisition Cost

This metric is basically used to assess the effectiveness of your marketing strategy by showing you the marketing costs you incur on each customer you successfully convert.

Key Performance Indicators for Marketing

Principally, the success of your marketing strategy can be gauged by assessing the rise in revenue that follows. This, however, isn’t enough to know the exact impact a marketing strategy has on an e-commerce site.

There are several KPIs for marketing that can accurately measure the effects of a marketing campaign on a business. Here are some of them:

Site Traffic

This basically tells you the number of total visitors to your site. An increase suggests that your marketing strategy is in full effect and working perfectly.

Number Visitors — New vs Old

This KPI gives a measure of the number of new visitors to your e-commerce website in relation to those returning for subsequent visits. This parameter doesn’t really say much unless you engage in a marketing campaign that specifically targets returning visitors. If this is the case, then the number of returning visitors should be higher.

Time on Site

This lets you know the amount of time spent by visitors on your website. Ultimately, you want your visitors to stick around on your website as it improves your chances of converting their visits into sales. One way to achieve this is to have landing pages and also a blog on your site to keep your visitors engaged.

Bounce Rate

Your site’s bounce rate is basically the rate at which visitors leave your website after only viewing a page. It is an important KPI that helps you assess the quality of your site. A very high percentage simply means that your e-commerce store is poorly built or perhaps defective.

Pageviews Per Visit

This is the number of pages in your online store that a visitor views on one single visit. A high value often suggests that your visitors engage in a lot of activities on your website.

Average Session Duration

This calculates the average time spent on your site by a visitor in one visit.

Traffic Source

The sources of traffic to an e-commerce website include direct, organic (search engine), social media, and referral (backlinks).

Mobile Traffic

Your traffic on mobile devices is also important, and carrying out a thorough analysis lets you know if you need to make your site more responsive.

 

Number of Newsletter Subscribers

This KPI helps you to gauge the success of your email marketing campaign. A higher value means your campaign was a success.

Subscriber Growth Rate

It is important for you to consistently measure the rate at which your subscriber list is growing. The data provided by this KPI can be used to execute an even more effective email marketing campaign.

Email Open Rate (EOR) and Email Click-through Rate

These two KPIs basically tell you the rates at which your emails are opened and the links within are clicked by your subscribers. Having knowledge of this information is crucial as it helps you craft better content for your email marketing endeavor.

Unsubscribes

This is the rate of unsubscriptions in your email list

Average Click-through Rate

This measures the percentage of visitors to your e-commerce site that clicks on links within your site.

Pay Per Click Traffic Volume

If you choose to engage in PPC marketing, this KPI helps keep a tab on the amount of traffic you are generating from it.

Ads CTRs

The click-through rates for banners and other ads on your site play an important role in a site’s revenue. It also lets you know the percentage of your visitors that are clicking the ads on your site.

Affiliate Performance Rates

Finally, this KPI helps you measure the performance of your site’s affiliate program, which can also be used to assess the overall success of your website. Once you decide which of these key performance indicators are important to your business, you can start optimizing them. To supercharge your WooCommerce store and improve these indicators, check out our WooCommerce solution based on AWS.

Performance Audit Meaning

A performance audit is an assessment of operations or functions, efficiency, effectiveness, and compliance to legal and other requirements of an entity to determine whether functions are working as intended . It is done  to implement improvements so that desired goals can be achieved. It is mostly done in case of the governmental organizations and nonprofit making organizations.

What Is a Performance Audit?

A performance audit is an independent assessment of an entity's operations to determine if specific programs or functions are working as intended to achieve stated goals. Performance audits are typically associated with government agencies at all levels as most government bodies receive federal funding.

KEY TAKEAWAYS

A performance audit is an independent assessment of an entity's operations, typically associated with government agencies.

The goal is to evaluate the performance of stated programs to determine their effectiveness and make changes if needed.

The standards for the audits are laid out by the U.S. Government Accountability Office (GAO)

The scope of a performance audit varies, but usually includes an assessment of effectiveness, efficiency, and compliance with legal requirements.

Understanding Performance Audits

In government, a performance audit is designed to examine the efficiency and effectiveness of a program, with the goal of implementing improvements. According to Generally Accepted Government Auditing Standards (GAGAS), the term "program" can include government entities, activities, organizations, programs, and functions.1

The standards for the audits are laid out by the U.S. Government Accountability Office (GAO) and the principal aim is to provide objective data that may be used to reduce costs and make other improvements.2

The specific objectives of an audit can vary. They may include the effectiveness, economy, and efficiency of a program and compliance with legal requirements. An audit's scope is wide and can seek to determine fraud and wasteful processes that are a hindrance to the stated objectives of a program.

Requirements for a Performance Audit

The standards for the performance audit are laid out by the GAO and cover three areas: general, field, and reporting.

General Standards

General standards cover matters such as professional judgment, quality control (QC), and competence of the auditor and the audit process. General standards seek to ensure that the auditor is independent, capable, and abides by internal QCs.

Field Standards

Field standards apply to planning, gathering material for evaluation, and preparing quality documentation. This topic seeks to outline the objectives, their purpose, and the manner in which they will be sought.

Reporting Standards

Reporting standards relate to the content of the report and the communication of the findings. These touch on the format of the audit report and lay out to whom the report must be disseminated and how. 

Benefits of Performance Audits

Once a performance audit is completed, the findings are delivered to the management of the specific organization or program. The goal is for them to use the findings to implement any changes to improve processes that will help them achieve the stated goals. Typically, a follow-up performance audit is done to assess whether management has implemented any of the audit findings and if there has been any improvement by doing so.

Performance audits serve a fundamental purpose of government accountability. Through performance audits government entities are held to objective standards of executing the responsibilities that they are legally authorized and charged to carry out.

Higher-level appointed staff and elected officials review the results of audits to oversee the proper, legal, and cost-effective operation of public services and programs. Publication of the results allows the public to see if certain programs are worth their tax dollars, and they can use the information to make educated voting decisions. 

Audit Function as A Performance Measurement Tool

Management controls, auditing, and evaluation are processes and mechanisms that are designed to assure that budgeting is linked to the real world of program operations. Without these links, there would be considerable risk that decisions would be based on flawed information, that resources are mismanaged, and that the decisions would be ignored by the operating organization.

Auditing is an accounting process used in business. It uses an independent body to examine a business financial transactions and statements. The ultimate purpose of this form of auditing is to present an accurate account of a company financial business transactions. The practice is used to make sure that the company is trading financially fairly and also that the accounts it is presenting to the public or shareholders are accurate and justified.

The results of the audit procedure can be presented to shareholders, banks and anyone else with an interest in the company. One of the main reasons for a financial audit is to ensure that the trading company is not practicing any deception. This is why it is done by an independent third party.

According to Lawrence R. Dicksee, 

"An auditing is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate".

According to A.W. Hanson, 

"An auditing is an examination of such records to establish their reliability and the reliability of statements drawn from them".

Auditing in its modern form has adopted a multi-dimensional approach. At present, the scope of auditing is not restricted to only financial audit under the Companies Act. The purpose of auditing has been extended to cost accounts, managerial policies, operational efficiencies, system applications, social implications of business organisations and environmental aspects too. Even non-business organisations avail the services of qualified auditors and get their accounts audited. At present, the field of audit also covers the following:

Checking cost accounting records and verifying the cost accounting principles that have been adopted in preparing and presenting cost accounting data, i.e., cost audit. 

Comprehensive examination and review of managerial policies and operational efficiency, i.e., management audit. 

Checking the performance of the organisation and comparing it with the overall performance of the industry in which the organisation belongs, i.e., performance audit.

Critical examination and analysis of the contribution of the organisation for the benefit of the society, i.e., social audit.

Evaluation and measurement of efficiency of the human resources in the organisation and comparing it with the expected utilization of the human resources as a whole, i.e., human resource audit.

Performance Measurement Tool as a Audit Function

Following are the different audit function as a performance measurement tool:

• Financial Audit
• Internal Audit
• Cost Audit

• Management Audit
• Auditor's Report

Importance of Audits

Audits are a necessary and important part of the financial world. That's because a company's financial health and well-being can't be upheld without proper accounting. Routine audits ensure that companies are following reporting standards and, more importantly, that they are being truthful and honest about their financial position. Audits are particularly important for shareholders and lenders as well as consumers and suppliers.

The process of auditing also helps companies in other ways, including:

• Finding inefficiencies
• Improving production and operations
• Meeting compliance requirements
• Establishing procedures for monitoring
• Fraud prevention

What's the Purpose of an Audit?

Audits are generally meant to ensure that businesses and individuals are being honest and accurate about their financial positions. But, the purpose of an audit depends entirely on the type of review in question.

For instance, corporations are routinely audited to ensure they are compliant and are following accounting standards. Audits also ensure that businesses are representing their financial well-being accurately.

Tax agencies conduct routine audits at random or may do so if someone's tax return is flagged. Things that may trigger an audit include specific tax credits and deductions, or certain types of income.

• Financial audit definition

A financial audit, also referred to as a financial statement audit, is an objective evaluation of your company’s financial statements. They are usually conducted on an annual basis. While financial audits can be conducted internally (by an employee), most of the time, your stakeholders will want an audit from an independent body. As such, you’ll probably need to reach out to a Certified Public Accountant (CPA) firm to conduct your audit. Ultimately, the aim of a financial audit is to ensure that your financial records are an accurate representation of your organization’s financial performance.

Why is an audit of financial statements necessary?

Although an audit of your financial statements may make you feel like you’re under the spotlight, the process is intended to assure your stakeholders that management has provided a “true and fair” view of the business’s financial position. This confirms that your company’s financial processes are all above board – minimizing the risk of fraud – and that your accounting documents aren’t covering up for any financial mismanagement. However, it’s also important to note that financial statement audits can bring value to your business by identifying controls or processes that could be improved, thereby enhancing the quality of your business.

Financial audit checklist

Preparing for a financial audit? Don’t worry if you’re nervous – financial statement audits can be frightening, but as long as you prepare adequately, you should be able to get through it with a minimal amount of fuss. You can take three basic steps before the audit gets started to ensure that you’re ready. See our financial audit checklist for a little more information:

Implement robust accounting practices – Putting acceptable accounting practices in place year-round can ensure that your financial audit goes as smoothly as possible. Be sure to reconcile your accounts on a regular basis and document your expenses throughout the year.

Review your financial information – It will also help if you undertake a mini-audit of your financial statements. Ultimately, your accounts need to be as transparent as possible. If you have a strong understanding of your accounting records, you can help the auditor by clearing up any questions they have as quickly as possible.

Gather your documents – Finally, it’s a good idea to prepare a full list of the required accounting documents and provide it to the auditor before they begin work. This way, they won’t need to spend additional time and money tracking everything down.

 

What is a financial audit?

An audit is an auditor's analysis and verification of a company’s financial statements and records. The auditor verifies the records and statements of the company to see if they are accurate and a fair representation of the company’s financial situation and transactions. The accounts are also checked to see if they follow the acceptable accounting norms and if there is any misstatement or malpractice in the calculation and generation of the financial statements.

In addition to the financial records and statements, an audit checks the company’s internal controls for effectiveness. An audit examines the accounting processes and helps identify ways to streamline and improve them. It provides an expert opinion on whether processes can be improved .

Auditors are usually selected by the board of directors or management. They are selected to be people who are not connected to the business or the business's accounting process in any way. This ensures objectivity and unbiased reviews of the company’s accounting system, controls and financial statements. The investors, shareholders and owners of the company can rest assured that the financial statements that they are presented with are true. An audit also ensures that the financial accounting practices that are being followed are as per the accepted accounting standards and company policies. This avoids manipulating the financial statements by using the wrong calculation methods and accounting practices.

Types of audits

A company can perform two main types of audits: external and internal audits.

External Audits

External audits are performed by auditors or an auditing firm. They are unbiased auditors who examine and review the company’s financials and financial statements. One of the main objectives of an external audit is to confirm if the company’s financial statements are true. An external audit will try to determine if there are any misrepresentations or misstatements in the financial statements. External auditing gives the stakeholders the confidence to make important decisions based on the financial statements that are released by the company.

A company’s accountants may become accustomed to using a set process or procedures. However, an external auditor examines the accounts to see if they are as per the acceptable accounting standards. The company may also have internal controls in place. An external auditor will be able to determine if these controls are effective. Since the external auditor is not invested in the process or operations, he/she is unbiased. The external auditor will be able to assess the processes and controls objectively. The auditor’s experience and expertise will help the company continually improve its processes and controls.

Internal Audits

Internal financial auditing is performed by the employees of the company. They report directly to the management, and their reports are used internally. An internal audit determines if the company’s controls are effective and if the processes are working as they should be. Since the internal auditor is a part of the process, they are less likely to criticize the process too much. Since the auditors assess their own operations and processes, they are less likely to be objective.

Internal audits give the management feedback based on which they make their decisions. Internal audits also verify the accuracy, compliance and completeness of the records. Internal audits are performed more frequently than external audits and can be used to identify personnel or departments who are not maintaining their records properly. Regular internal audits keep the company’s financial accounting procedures aligned and  help the company prepare for external audits.

Advantages of auditing a company

Some of the main advantages of financial auditing are:

Consistency and compliance

Auditors are experts in financial accounting standards as well as the local laws and regulations. If the company is intentionally or unintentionally not compliant with accounting standards or the law, an audit will be able to identify the same

Effective systems and controls

An objective assessment of the company’s processes and internal controls provide valuable feedback. Regular audits help the company evolve its systems and controls to be effective.

Easier insurance claims

Insurance claims are usually disbursed only after a full audit to verify the value of the claimed damage. When audits are performed regularly, the insurance companies know that the amount that is being claimed is correct.

 

 

Examine profit or loss

Audited financial statements provide a clear picture of the financial status of the business. One of the advantages of financial auditing is that one can clearly determine if the company is making a profit or a loss or any problem areas. An audited financial statement is an essential management tool for informed decision making. Comparing subsequent reports also helps determine if any changes in policy have impacted the finances.

Obtaining finance and investments

Audited reports enhance the reputation and trustworthiness of a company. A company that has a history of maintaining audited financial reports is more attractive to investors and financial institutions. So attracting investments and obtaining loans is easier when the company has a set of audited reports.

Easier winding up

In the event of winding up or selling the business, a correct valuation of the company is essential. An audited financial statement shows the value of the assets and liabilities of a company. It makes it easier to find and negotiate with buyers when the paperwork has been audited.

Easier tax calculations

The tax that a company is liable to pay depends on the profit and other factors in the financial statements. Audited reports are essential to make accurate calculations of taxes to be paid. Submission of audited reports is mandatory for certain government filings.

 

Fraud detection

Unfortunately, fraud and embezzlement happen in some organizations. Regular audits help detect such cases of fraud. Auditors can also help the company take suitable action against the offenders. Financial auditing also acts as a preventive measure for potential offenders who will be less likely to attempt fraud when they know that the accounts will be checked thoroughly. Fraud prevention is also one of the advantages of financial auditing.

Better planning and budgeting

A reliable set of financial documents at regular intervals help identify business trends. Accurate reports equip management with the information that they need to make better decisions. Financial data helps the company plan for the future and allocate budgets. Better decision making makes a company more competitive and successful.

Gathers evidence

In the case of detection of malpractice by the auditor, the process of financial auditing gathers the evidence required to prove the malpractice. An auditor cannot make allegations of malpractices without having such evidence in hand. Once there is proof of wrongdoing, it is more difficult for the wrongdoer to cover their tracks.

Increases credibility and reputation

When an auditor gives a report of all the accounts being in order, it enhances the trust that the company’s board, owners and stakeholders have in the management. It also boosts the morale of the company’s personnel who know that their work has been examined and that they have done their jobs well. The image, respect and goodwill of the company get a boost after a favorable auditor’s report.

• What is Cost Audit?

Cost audit is an important and continuous process that a company has to execute properly during its entire existence in the market. It accounts for the complete verification of the cost records of the company and also takes into consideration the other different types of accounts. Tracking the cash flow in a company and correcting the instances where wrong data exists is the main objective of the cost audit. To understand in-depth what cost audit is, you have to understand its functions, importance, and advantages.

Objectives of Cost Audit

If someone has to read about why Cost audits are important, they have to understand what are the objectives and benefits of cost audits. Some of the objectives of cost audit are enlisted below:

1. To maintain the accuracy of the data related to cost.
2. To ensure coverage of all arithmetic data in any account book. 
3. It helps in maintaining all cost-related principles and complete adherence to preparing cost accounts.
4. It helps in detecting errors, drawbacks, and frauds in accounts and correcting them immediately.
5. To observe if all features of cost audit are properly followed.
6. To check the overall working condition of the cost department also comes under the process of cost audit.
7. For ensuring proper management and usage of cost strategies at the right time. 
8. To develop correctness among internal auditors of the company. 

Types of Cost Audits

There are several types of cost audit processes. Each one is done on behalf of some organization. Below are the examples.

• Cost Audit on behalf of the government.
• Auditing on behalf of Assist Management. 
• Cost Audit on behalf of tribunals. 
• Auditing for the trade association. 
• Cost Auditing under the Statute of the company.

However, apart from the above, there are other types of cost audits that depend on the necessity of the companies. One has to understand the meaning of cost audit properly to exclusively design the process for a specific company.

Applicability of Cost Records

According to Rule 3 of the Companies, Cost Records and Audit 2014, all cost records should be placed for the companies that produce commodities cited on Table A or Table B. The applicability of cost records will be considered mandatory in case of the above situation or has an aggregated turnover in the preceding year over INR 35 crore. 

So, the applicability of the cost records is generally for large companies with a high turnover. In no case, the cost records will be applicable if both the above conditions are not satisfied. 

Functions of the Cost Auditor

1. A cost auditor is the one who is responsible for the execution of cost auditing. The functions of a cost auditor are as follows.
2. Make clear cost audit reports with all the facts and data intact.
3. A cost auditor should make qualifiable reports.
4. Helping the central government with the cost auditing report in case of an investigation.
5. Cost auditor and financial audit have a vital connection as he has to omit the drawbacks and wrong implementations. 

 

Advantages of Cost Audit

1. There are a number of advantages of cost audit and they are mentioned below briefly.
2. The features of cost audit help it to point out any wastage for the company.
3. The importance of cost audit is there as it points out the drawback in the production process of a company. 
4. The stock value and worth of inventories can be integrated easily by cost auditing. 
5. Proper cost auditing ensures effective staff management and tracking the functions of a staff auditor. 
6. One of the other advantages of cost audit is to mark the inefficiency of staff or processes that can decrease the profit of the company. 

v  Fun Facts

An efficient cost audit by a company can lead to a lesser number of incidents of fraud and laundering. Nowadays, large companies organize half-yearly cost audits to be clear about cost-related outcomes.

A cost audit is a systematic study of a company's or organization's expense accounts and records. It ensures that the cost of its products or services has been correctly categorized and computed. In addition, consistent cost accounting concepts and methodologies outlined in applicable rules and standards are employed.

What is Cost Audit?

A cost audit examines a non-profit entity's expense records and other related information. The major goal of this strategy is to assure stakeholders such as shareholders, management, and regulatory authorities that a company's cost information is credible and by applicable legislation and standards.

 Cost Audit Consists of The Following Elements:

(a) Checking the cost accounting records for the correctness of cost accounts, cost reports, cost statements, and cost data; and

(b) Examining these records to ensure that they are by cost accounting principles, plans, methods, and objectives.

The cost auditors' approach should guarantee that the cost accounting strategy adheres to the organization's objectives and that the accounting system is directed toward achieving these objectives. The cost auditor should also prove the accuracy of the statistics by vouching for verification, reconciliation, and so on.

Benefits of Cost Audit:

Management, society, shareholders, and the government all gain from cost auditing. The benefits are as follows:

v  Benefits of Management:

•  Management receives trustworthy data for its daily activities, such as price setting, control, decision-making, etc.
•  Management will keep a close check on all wastages if there is a reliable reporting system in place.
•  To assist remedial action, inefficiencies in the way the firm operates will be made public.
•  By giving each manager their own set of tasks, management by exception becomes viable.
•  The standard costing method and budgetary control will be made much easier.
•  A business can set up a trustworthy check on the closing stock and work-in-progress valuation.
•  It helps in the fraud and error detection process.

v  Society:

• Cost auditing is frequently a part of price fixing. As a result, according to information from Audit Cost, setting prices protects customers from being taken advantage of.
• Given that certain sectors of the economy forbid price rises without a valid rationale, such as a rise in manufacturing costs. Preventing price increases, will lower inflation and sustain consumer living standards.

v  Shareholder:

A cost audit makes sure that accurate records are kept about the acquisition and use of goods, salary costs, etc. Additionally, it makes sure that work-in-progress and closed stocks are fairly valued. Companies may guarantee their shareholders a reasonable return on investment in this way.

 

v  Government:

•  When the government engages in a cost-plus contract, a cost audit helps in determining a fair price for the contract.
•  It establishes the maximum pricing for necessities, preventing unauthorized profiteering.
•  The government could focus on ineffective departments due to cost audits.
•  It gives the government the option to decide to preserve particular businesses.
•  It makes it easier for government-requested trade disputes to be resolved.
•  Cost audits and the ensuing management decisions might encourage wholesome rivalry among the many businesses in the sector. As a result, inflation is automatically controlled.

Drawbacks of Cost Audit:

• Cost audits have many drawbacks in addition to their numerous positives. Among the most important drawbacks are the following:
• Cost: Carrying out a cost audit may be expensive and time-consuming. Specialized auditors must be hired for this procedure, and their costs may be expensive.
• Complexity: A cost audit entails a thorough investigation of the cost accounts and records of a firm, which can be challenging and call for a high degree of competence.
• Management opposition: Businesses may see cost audits as an intrusion into their business operations and oppose the audit process. As a result, management might not cooperate as expected, which would make the audit process less efficient.
• Difficulty in fraud detection: A cost audit is ineffective for fraud detection. As a result, it may be challenging for auditors to spot fraudulent actions, particularly if they are well-masked.
• Limited scope: It only considers the operational costs of a corporation. Furthermore, it doesn't give a whole picture of its financial success.

Solved Examples

Q1. What is the provision of a Cost Audit?

Answer: The Companies Act, Section 148 states that there are two tables on which the applicability of the audit depends on. These are tables A and B. the details of Table A and Table B goods are as follows.

Table A Goods: Total turnover greater than 50 crores and aggregate turnover over 25 crores in case of commodities and services.

Table B Goods: Total turnover of goods over 100 crores and aggregate turnover over 35 crores for commodities and services. 

1. What are the simple steps to carry out a Cost Audit for your company?

• The simple steps to carry out a cost audit for your company are as follows.
• Know the position of the company.
• Check for the necessary changes to make in a financial year.
• Make good use of the reduction plan wherever applicable. 

The position of the company is determined by the place it holds according to the turnovers and profits. Expert cost auditors must always determine it primarily. Secondly, auditors should make the necessary changes to the various financial aspects of the company. An auditor should also look for less expensive substitutes that can bring down the expense of the company. Reduction plans, if taken efficiently can save a lot of money.  

2. What does the Cost Audit report contain?

3. What are the types of cost audits?

4. What is the applicability of cost records?

5. What are the functions of a cost auditor?

6. What are the advantages of Cost Audit?

7. What are the provisions of a cost audit in Indian law?

Applicable Provisions:

1.   Section 137,148 & 177 of Companies Act, 2013

2.   Rule 3, 4 & 14 of the Companies (Cost Records and Audit) Rules, 2014.

What is Management Audit?

Management Audit is a thorough examination of an organisation’s managerial actions, policies, and procedures. This evaluation goes beyond simple compliance, delving into the effectiveness and efficiency of management in carrying out their responsibilities. The goal of this type of audit is to ascertain how well management is executing its duties and to identify areas for potential improvement. By focusing on how managers utilize resources, align with the company’s overall strategy, and adhere to both legal and ethical standards, the audit can uncover both strengths and weaknesses within the organisation’s management structure.

When conducted properly, a management audit offers valuable insights into how an organisation can improve its operations. It highlights areas where resources might be better allocated, where policies might need updating, or where managers might benefit from additional training or support. The result of such an audit is often increased transparency, accountability, and overall performance within the management layer of the organisation.

Features of Management Audit

Some of the features of a Management Audit include:

1. Comprehensive Evaluation: Management Audits involve a thorough assessment of various aspects of management practices, processes, and performance within an organisation. It aims to provide a holistic view of how the organisation is managed.

2. Objective Analysis: The audit is conducted with objectivity and impartiality. The auditors or consultants conducting the management audit should not have any bias that could influence their findings and recommendations.

3. Systematic Approach: Management audits follow a structured and systematic approach to gather relevant data, analyze information, and identify areas of improvement. It ensures that the audit is conducted in a methodical manner.

4. Focus on Effectiveness and Efficiency: The primary focus of a management audit is to evaluate the effectiveness and efficiency of management practices in achieving the organisation’s goals and objectives.

5. Identification of Strengths and Weaknesses: Management audits identify the organisation’s strengths, which can be leveraged, and weaknesses that need to be addressed to enhance overall performance.

6. Risk Assessment: Management audits assess potential risks and vulnerabilities in management practices and offer recommendations to mitigate these risks.

7. Benchmarking: The audit may involve benchmarking the organisation’s management practices against industry best practices or against its previous performance to identify areas for improvement.

8. Employee Feedback: Management audits often include gathering feedback from employees at various organisational levels to understand their perspectives and experiences with management practices.

Objectives of Management Audit

The objectives of a Management Audit are as follows:

1. To Evaluate Management Effectiveness: The primary objective of a management audit is to assess the effectiveness of the organisation’s management practices, including planning, organising, directing, and controlling, in achieving the organisation’s goals and objectives.

2. To Identify Strengths and Weaknesses: A management audit aims to identify the strengths and weaknesses of the organisation’s management processes and practices. This helps in leveraging the strengths and addressing the weaknesses to improve overall performance.

3. To Assess Efficiency and Resource Utilization: The audit evaluates how efficiently the organisation is utilizing its resources, including financial, human, and other assets. It seeks to identify areas where resources can be optimized for better outcomes.

4. To Review Decision-Making Processes: The audit examines the decision-making processes within the organisation to determine their effectiveness, timeliness, and alignment with the organisation’s objectives.

5. To Analyze Leadership and Organizational Structure: Management audits assess the leadership capabilities and the organisational structure to ensure they support effective communication, collaboration, and accountability.

6. To Evaluate Risk Management Practices: The audit evaluates the organisation’s risk management practices, including how risks are identified, assessed, and mitigated.

7. Ensure Compliance and Governance: Management audits may also review the organisation’s compliance with laws, regulations, and internal governance policies to identify potential gaps and areas for improvement.

Uses of Management Audit

Management Audit serves various useful purposes for organisations. Some of the key uses of management audits are:

1. Performance Evaluation: Management audit helps evaluate the performance of management practices, processes, and personnel. It provides an objective assessment of how well the organisation is managed and identifies areas for improvement.

2. Identify Inefficiencies: The audit helps in identifying inefficiencies in management processes, resource allocation, and decision-making. It highlights areas where resources are being underutilized or wasted.

3. Improve Decision-making: By evaluating decision-making processes, a management audit provides insights into the effectiveness of decisions taken at various levels of the organisation. It helps in making informed decisions that align with the organisation’s goals.

4. Risk Assessment: Management audit assesses risk management practices and identifies potential risks and vulnerabilities. It allows the organisation to strengthen risk management strategies and minimize potential threats.

5. Enhance Organisational Structure: The audit examines the organisational structure and identifies opportunities for streamlining communication, improving collaboration, and increasing efficiency.

6. Benchmarking: Management audit often involves benchmarking against industry best practices or successful competitors. This allows the organisation to learn from others’ experiences and adopt proven management strategies.

7. Strategic Planning: The findings of the management audit can inform the strategic planning process, enabling the organisation to set realistic goals and create action plans based on its management capabilities.

8. Strengthen Internal Controls: The audit assesses the effectiveness of internal controls and governance mechanisms, ensuring compliance with policies, laws, and regulations

Objectives

Let us understand the objectives behind the curation of a management audit report through the explanation below.

  

#1 – Establishing Proper StrategiesThe team must ensure the ability of the management whether it has proper strategies to obtain the required information for better decision making. Again the team also ensures that the collected data is sufficient to achieve the organization’s objectives without hassles. Usually, the strategies are the key to achieving the goals of any establishment.

                       

 

#2 – Implementation of Required Internal Control

The audit team should verify the effectiveness of the organization’s Internal Control to overcome the management deficiencies. If the Implemented Internal Controls are not effective enough, it will lead to unnecessary problems in the process.

Example: In a reimbursement policy of a company, first, an accountant verifies the documents, and then the Senior Accountant will review the same documents. Finally, the cashier pays the cash, ensuring a triple check on the transaction. Here the internal control is so strong that it avoids any manipulation of cash.

#3 – On-time Report Generation

The management Audit team should confirm whether the management placed proper control to generate and provide the reports on time.

Report generation will be called an essential tool for the identification of errors. Sometimes it will also act as a whistleblower to control the greater mistakes during the process.

Generally, the reports of the audit should improve the efficiency of the management for the betterment regularly.

Process

 

Below is a step-by-step process for unlocking the ultimate potential of management audit scope. Let us understand each step-in detail through the discussion below.

#1 – Appointment of Proper Personnel

In the audit process, a proper person should be appointed to execute the plan under a management audit. Proper in the sense that he must be professionally qualified, knowledgeable, and experienced to perform the audit plan without ambiguities.

#2 – Drafting Audit Programme

• Collection of required documents
• Assessment of policies and procedures
• Monitoring the Strategy
• Inspection of Books and other supporting documents
• Investigate with available Information
• Inquiries with staff/team
• Observing the internal control
• Test check of the transactions and their results
• Scientific method evaluation and review (If necessary)
• Preparing the reports with solutions

#3 – Training Programme

Proper training must be provided to the team before executing the audit.

Example: Management audits on Construction industries require specific evaluation skills and techniques, which must be provided before the execution.

#4 – Time Concern

Every plan of the audit program must be executed on a proper timeline to get the exact results of it.

Example: Observing the manufacturing process can identify normal and abnormal wastage, which should be executed during the process.

#5 – Frequencies of Audit

An audit should be conducted frequently to identify the mistakes occurring during the decision-making process.

Frequencies may be decided based on the nature of business and also to be considered with the duration of understanding of business and its transactions

#6 – Reports with Solutions

• Usually, the audit report consists of errors that interrupt the management from making the proper decision.
• The team should provide their findings and the required solutions to overcome the issues.
• Every report should provide a detailed analysis of its repercussions in the future.

Types

Management audit reports come in various types, each focusing on different aspects of an organization’s management processes. The main types include:

• Operational Audit: Assesses the efficiency and effectiveness of an organization’s day-to-day operations. Identifies areas for process improvement and cost reduction.
• Financial Audit: Evaluates an organization’s financial systems, including accounting, budgeting, and financial reporting. Ensures financial accuracy, compliance with regulations, and sound financial practices.
• Compliance Audit: Examines an organization’s adherence to legal and regulatory requirements. Helps identify and rectify any non-compliance issues.
• Performance Audit: Measures the effectiveness of an organization’s programs, projects, or activities in achieving their objectives. Focuses on outcomes and results.
• Information Systems Audit: Reviews an organization’s IT systems, data security, and information management. Aims to ensure data integrity and safeguard against cyber threats.
• Strategic Audit: Evaluates the alignment of an organization’s strategies with its long-term goals. Assesses the effectiveness of strategic planning and implementation.
• Human Resources Audit: Assesses HR policies, practices, and compliance with labor laws. Identifies areas for improving talent management and workforce productivity.
• Environmental Audit: Evaluates an organization’s environmental impact and sustainability practices. Helps identify opportunities for reducing the environmental footprint.

Examples

Now that we understand the basics, process, and types of a management audit scope, let us apply the theoretical knowledge to practical application through the examples below.

Example #1

M/s ICI information technology services face a lot of trouble finishing their projects on time. They incurred huge losses due to the delay in the management decisions and related processes. They have appointed an auditor recently to do an audit on the management and their decision-making process.

Based on the audit, the following are the findings:

• No Proper internal control in the management to finalize the projects on time;
• No proper communication with clients to finalize the projects on time;
• No coordination between management and teams to complete projects.
• No proper report generation software for internal control;
• The above findings are to be cleared out to get good feedback in the future.

Example #2

Nepal’s ministry of federal affairs and general administration directed their local bodies to get a management audit conducted at regular intervals based on the Management Audit Guidelines, 2022.

The circular, which was also circulated through the official websites of the government, cited the importance of these audits to ensure efficiency in management audit is conducted through inspection, supervision, monitoring, evaluation, inquiry and examination of services to be delivered by public entities. The impetus is placed on this function to ensure public entities are working as per the annual plan, program, and budget.

Importance

Management audit reports are a critical aspect of sound corporate governance. Below are some key points highlighting their importance.

• Management audits assess operations, identifying inefficiencies and suggesting improvements, ultimately leading to cost savings.
• They help in identifying and mitigating risks by assessing compliance with regulations and the effectiveness of risk management practices.
• Management audits evaluate whether an organization’s strategies align with its objectives, ensuring that the company is on the right path.
• By providing valuable insights, management audits enable better-informed decision-making at all levels of an organization.
• Financial and compliance audits within management audits ensure that financial reporting is transparent and accurate.
• Management audits ensure that the organization complies with all relevant laws and regulations, reducing legal risks.

 

Advantages

Let us understand the advantages of concentrating on the management audit scope through the points below.

• Proper Strategy Preparation and formation to achieve the objectives.
• Proper Placement of Internal Controls for effective decision making;
• Improvisation of the management decision-making process;
• To overcome the deficiencies of the management.
• Deployment of proper human resources.
• Rectification of Errors with the least cost or less damage;
• Avoid abnormal wastage of resources such as men, materials, money & machines.
• Timely results without delay.

Disadvantages

Despite the various advantages discussed in the section above and throughout the article, there are a few factors of management audit reports that prove to be a disadvantage. Let us understand them through the discussion below.

• Lack of Investments and Technology – Generally, the suggestions may involve high investments in 4M resources such as Men, Machinery, Materials, or Money, which will be an issue for most organizations. Sometimes the classical process may require change with a technological update. Still, the organization’s management or staff may have trouble undergoing the new or required updates.
• Lack of Management support for the change – The organization’s management may have some trouble changing from their classical process to the latest one for many reasons.
• Staff Behavior is a problem sometimes in executing the audit plan because they may resist providing the basic information for the audit at the time of discussions, interviews, or inquiries. They used to feel that their mistakes would come out during the audit process if they provided all the necessary details for the audit.
• Tackling top management is also an issue in certain situations where senior management will be against the audit process.

 

 

Key Difference – Profit Center vs Investment Center
 The key difference between a profit center and investment center is that a profit center is a division or a branch of a company which is considered to be a standalone entity that is responsible for making revenue and cost related decisions whereas an investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions. Selection of operating entities such as profit centers or investment centers is a decision that should be made by the top management of a company. Top management intervention in an investment center is significantly low compared to a profit center where divisional managers in an investment center have more divisional autonomy than managers in a profit center.

What is a Profit Center?

A profit center is a division or a branch of a company that is considered to be a standalone entity. A profit center is responsible for generating its own results where the managers generally have decision-making authority related to the product, pricing, and operating expenses. Managers in a profit center are involved in all decisions relating to revenues and costs, except for investments. Decisions regarding investments such as acquiring or disposing capital assets are taken by the top management in corporate headquarters. Having profits centers makes it convenient for the top management to compare results and to identify to what extent each profit center contributes to corporate profits.

E.g. JKT Company is a multinational company that produces high-end cosmetic products. JKT operates in 20 countries around the world. Cosmetics are produced in manufacturing plants located in all 20 countries. Each operation in respective countries is operated as profit centers where the divisional managers are responsible for all revenue and cost related decisions.

The concept of profit centers enables the company’s management to decide how best to allocate its resources to maximize profitability by,

·         Allocating more resources to high profit-making entities

·         Improve the performance of loss-making units

·         Discontinue entities that do not have future potential

What is an Investment Centre?

An investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions. Investment centers are business units that can utilize capital to directly contribute to a company’s profitability. Businesses have to make various decisions regarding investing in capital assets that enable long-term viability. These include decisions to purchase, dispose and upgrade capital assets. Continuing from the same example,

E.g. In addition to decisions regarding revenues and costs, divisional managers in JKT have the authority to decide which new capital assets to purchase, which ones should be upgraded and the ones that should be disposed.

The main evaluation criterion for an investment center is to assess how much revenue it generates as a proportion of its investment in capital assets. Companies can use one or a combination of the following financial metrics to evaluate the performance of an investment center.

Return on Investment (ROI)

ROI allows calculating how much returns are made compared to the amount of capital invested and calculated as,

ROI = Earnings before interest and tax (EBIT)/ Capital Employed

Residual Income (RI)

RI is a performance measure normally used to assess the performance of business divisions, in which a finance charge is deducted from the profits to indicate the usage of assets. Formula for calculating RI is,

Residual Income = Net Operating Profit – (Operating Assets* Cost of Capital)

Economic Value Added (EVA)

EVA is a performance measure normally used to assess the performance of business divisions, in which a finance charge is deducted from the profits to indicate the usage of assets. EVA is calculated as,

EVA = Net operating profit after tax (NOPAT) – (Operating assets* Cost of capital)

An investment center makes decisions about costs, revenues, and investments

 

What is the difference between Profit Center and Investment Center?

Profit Center vs Investment Center
Profit center is a division or a branch of a company that is considered to be a standalone entity that is responsible for making revenue and cost related decisions.	Investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions.
Decisions Regarding Capital Assets
Decisions regarding capital assets in profit centers are taken by top management at corporate headquarters.	Decisions regarding capital assets in investment centers are taken by divisional managers in investment centers.
Autonomy for Divisional Managers
Profit center divisional managers have less autonomy compared to investment center managers since they are not authorized to make investment decisions.	Investment center divisional managers have high level of autonomy since they are authorized to make investment decisions.

Summary – Profit Center vs Investment Center

The key difference between profit center and investment center mainly depends on whether the decisions regarding purchase and disposal of capital assets are taken by the top management at corporate headquarters (in profit centers) or by divisional managers in the respective business entity (in investment centers). Divisional managers in investment centers may be highly motivated than managers in profit centers due to their authority in decision making. Whether to operate business units as profit centers or investment centers often depends on the attitude of the top management, nature of the business and industry practices.

A brief summary of Enterprise Performance Management (EPM)

In a nutshell, EPM helps you analyse, understand and report on your business. It’s one of the central management tasks of a business, and when done correctly, it should include management processes such as:

Budgeting, planning and forecasting.

Modelling how the company creates value.

Consolidating the results

Analysing performance

A good EPM system collates and analyses data from multiple different sources, such as e-commerce systems, front-office and back-office applications, data warehouses and external data sources. EPM processes are designed to help plan, budget, forecast, and report on business performance as well as collate and finalise financial results. They’re primarily used by CFOs and the finance team, but other teams such as HR, Sales, Marketing, and IT use EPM for operational planning, budgeting, and reporting.

The 5 key components of enterprise performance management

The EPM process involves several key elements working together, including:

1. Data centralization

EPM systems unify data from multiple departments such as marketing, sales, customer service, human resources, information technology, and more. Automation algorithms draw this data from websites, ecommerce platforms, and other external sources and consolidate it within the EPM system to allow access to all teams.

Your marketing team, for example, might access sales data to see which campaigns yield the highest return on investment (ROI). This condensed view ensures everyone operates from a unified knowledge base, leading to more informed decisions.

2. Business strategy optimization

Modern EPM systems use AI and ML to provide predictive analytics. These advanced capabilities help teams anticipate future trends and challenges so they can strategize proactively. Instead of merely reacting to current data, these tools empower organizations to plan ahead and make informed decisions for their upcoming business activities and strategies.

For example, your EPM system might predict that smart home products will surge in demand after reviewing historical sales data and current market trends. This insight lets you prepare and invest in this product segment for the upcoming year, ensuring adequate inventory, tailored marketing campaigns, and a trained sales team ready to capitalize on this anticipated demand.

3. Efficient resource allocation

EPM systems analyze extensive data sets and generate detailed financial reports that help guide budget allocation across departments and projects. For example, an EPM analysis might reveal that your customer service department needs more resources to handle growing user counts. This broad data analysis encourages teamwork between different departments and with external vendors, promoting efficient and effective resource use.

4. Progress monitoring and reporting

EPM systems continuously measure performance against predetermined budgets and goals. They allow you to compare historical data with real-time figures so you can gauge progress against your target objectives and make timely adjustments to achieve them.

For example, if an email marketing campaign promoting a new product line collects lower click-through rates than anticipated, you can identify this shortfall through EPM data. This insight allows you to reevaluate the email’s design, content, or distribution list and realign your efforts, perhaps by segmenting your audience more effectively or adjusting the call to action (CTA).

You can also create in-depth reports, such as customer segmentation analyses, conversion funnel breakdowns, and ROI comparisons. These reports provide insights on past and present campaigns and are valuable references when planning future marketing strategies because they help you build on successes and avoid repeating mistakes.

5. Informed decision-making

By offering a comprehensive view of your business’s performance and profitability metrics, EPM systems empower you to make data-driven decisions. For example, if your EPM system flags an underperforming product line, you can delve deeper into the data to pinpoint the cause, whether it’s pricing, competition, or market saturation. Similarly, the system might highlight specific marketing channels as high-growth areas, suggesting a need to redirect resources to maximize engagement.

The benefits of enterprise performance management

EPM systems provide several advantages that help an organization maximize productivity and optimize the decision-making process. These include:

• Automated financial operations. Modern EPM software lowers the need for manual data entry, which reduces human error and streamlines financial processes through automation. This helps with budgeting and forecasting because it gives teams more time to focus on big-picture processes and analyses.
• Increased profitability. EPMs offer a comprehensive view of your financial operations by integrating and analyzing data from multiple sources. Revealing overstocked items, for example, minimizes inventory costs by reducing unnecessary storage expenses, preventing product obsolescence, and allowing for better cash flow management by freeing up funds in excess inventory. With these savings, you can redirect resources to more profitable areas, like research and development, to enhance overall efficiency and ROI.
• Integrated operational strategy. EPM systems help align your overarching goals with day-to-day operations. By centralizing data and key performance indicators (KPIs), multiple departments and employees can see how their tasks contribute to the larger vision and tweak their activities accordingly.
• Swift account reconciliation. Instead of manually sifting through individual financial accounts and entries, EPM software instantly compares transaction records from different sources, identifies mismatches or outliers, and alerts you for review. This automation accelerates the reconciliation process and minimizes the risk of human errors, ensuring accurate and compliant financial statements.
• Tax alignment. Evolving tax legislation causes companies to rethink their tax planning and management approach. EPM planning ensures tax reporting aligns with the organization’s financial reporting, allowing you to strategize finance-related activities for the short term. When new tax laws and regulations are enacted, for example, EPM modeling can predict the tax implications and their impact on your company’s financial statements.
• EPM systems allow organizations to meet regulatory requirements, make data-driven decisions, and practice financial prudence. They offer a modern, automated financial and data management approach that boosts productivity and strategically aligns personnel.
• Optimize your business for success with Webflow
• Achieving success requires precision, strategy, and the flexibility to take on unexpected challenges. EPM helps you improve performance and streamline operations — but to truly unlock its full potential, you need a platform that complements its capabilities.
• Webflow Enterprise serves as that essential partner to EPM tools by offering a sophisticated platform for data visualization, reporting, and communication. With Webflow, you can develop custom webpages that turn complex data from your EPM tool into visually appealing, intuitive charts, graphs, and dashboards.
• Beyond enhancing internal reporting and making it seamless for teams to access, comprehend, and act on critical data, Webflow’s robust content management system (CMS) ensures that these visualizations remain current and relevant and always reflect the latest insights from your EPM tools. Whether they’re for internal team collaboration or external partner engagement, we also offer resources on the Webflow blog that teach you how to optimize your EPM-driven presentations and webpages for the highest functionality.
• Explore how Webflow Enterprise can elevate your EPM implementation by transforming complex data into actionable insights through compelling web design. Start with Webflow today to scale your business and build a data-driven web presence that aligns with your strategic goals.

• In today's dynamic business landscape, staying ahead of the competition requires organizations to make informed decisions based on accurate and timely information. This is where Enterprise Performance Management (EPM) comes into play. EPM is a strategic approach that enables businesses to align their goals, strategies, and actions with data-driven insights, fostering improved performance and sustainable growth. In this comprehensive guide, we will explore the key aspects of EPM and how it can revolutionize your organization's decision-making process.

  1. Understanding Enterprise Performance Management (EPM):

  EPM encompasses a set of processes, methodologies, and technologies that empower businesses to effectively manage their performance. It involves activities such as goal setting, planning, budgeting, forecasting, reporting, and analysis. EPM focuses on aligning all aspects of an organization, including finance, operations, sales, and marketing, towards achieving strategic objectives.

  2. The Core Components of EPM:

  a. Strategy Management: EPM begins with defining and cascading strategic goals across the organization. This involves creating a strategic map, setting key performance indicators (KPIs), and monitoring progress towards goals.

  b. Planning and Budgeting: EPM facilitates the creation of comprehensive financial and operational plans and budgets. It involves collaborative forecasting, scenario modeling, and resource allocation to ensure optimal utilization of resources.

  c. Financial Consolidation and Close: EPM streamlines the financial consolidation process, enabling organizations to efficiently close their books and produce accurate financial statements. It helps ensure compliance with regulatory requirements and enhances transparency.

  d. Performance Reporting and Analysis: EPM provides real-time access to relevant performance data, empowering decision-makers with actionable insights. Through customizable dashboards, interactive reports, and advanced analytics, organizations can monitor performance, identify trends, and make data-driven decisions.

  Benefits of Implementing EPM:

  a. Improved Decision-Making: EPM enables organizations to make informed decisions based on accurate, up-to-date data, reducing reliance on guesswork and intuition.

  b. Enhanced Agility and Adaptability: With EPM, businesses can quickly respond to changing market conditions, adapt their strategies, and allocate resources efficiently.

  c. Increased Operational Efficiency: EPM streamlines processes, eliminates manual tasks, and reduces the risk of errors, enabling teams to focus on value-added activities.

  d. Greater Accountability and Transparency: EPM promotes accountability by establishing clear performance metrics and tracking progress against targets. It enhances transparency across the organization, fostering a culture of responsibility and collaboration.

  Conclusion:

  Enterprise Performance Management is a crucial strategic approach that enables organizations to align their goals, plans, and actions with data-driven insights. By implementing an effective EPM solution, businesses can make informed decisions, enhance performance, and achieve sustainable growth. Partnering with a trusted EPM service provider like Stractive can greatly facilitate the journey towards unlocking the full potential of your organization. Embrace EPM and empower your business to thrive in the competitive landscape of today and tomorrow.

   MCQ Questions of EMP

  SET -1

  1. In a revenue centre, the primary measurement is _____

  A. Expenses

  B. Cost incurred

  C. Output in physical terms

  D. Revenue

  View Answer

  D. Revenue

  2. _____ proposes the principles of Performance Management.

  A. Drucker

  B. Baron

  C. Grand Duke

  D. Taylor

  View Answer

  B. Baron

  3. Which of the following statements about performance management systems is not true?

  A. They encourage short-term decisions among managers

  B. They improve organisational performance in the long term

  C. Performance management systems are ineffective for big organizations

  D. Recommendations are prescriptive & suggest best way to deal

  View Answer

  B. They improve organisational performance in the long term

  4. Classification of responsibility centre is based on the nature of the monetary ______

  A. Inputs and outputs

  B. Inputs only

  C. Inputs and/or outputs

  D. Outputs only

  View Answer

  C. Inputs and/or outputs

  5. EVA/RI is used to measure _____

  A. Investment Centre

  B. Expense centre

  C. Profit centre

  D. Revenue centre

  View Answer

  A. Investment Centre

  6. ______ is not a customer-related performance measure.

  A. New Customers

  B. Customer satisfaction

  C. Customer volume

  D. Market Share

  View Answer

  D. Market Share

  7. DU PONT Analysis deals with ______

  A. Analysis of Fixed Assets

  B. Capital Budgeting

  C. Analysis of Profit

  D. Analysis of Current Assets

  View Answer

  C. Analysis of Profit

  8. A marketing function is an example of ______

  A. Revenue center

  B. Discretionary expense center

  C. Expense center

  D. Profit center

  View Answer

  A. Revenue center

  9. A strategic business unit is _____ center

  A. Revenue

  B. Investment

  C. Cost

  D. Profit

  View Answer

  D. Profit center

  10. What is a monetary measurement of the amount of resources used by a responsibility center?

  A. Cost

  B. Share

  D. Revenue

  C. Profit

  View Answer

  A. Cost

  11. _____ is not a component of MVA.

  A. Current operations value

  B. Net Present Value

  C. Invested capital

  D. Future Growth Value

  View Answer

  B. Net Present Value

  12. Return on Assets (ROA) ratio is given by ______

  A. Sales / Total Assets

  B. Gross Margin/ Net Sales

  C. Net Income/ Sales

  D. Net Income/ Total Assets

  View Answer

  D. Net Income/ Total Assets

  13. For the board of directors of the company, the entire company is a _____

  A. Human resource center

  B. Sales Center

  C. Profit center

  D. Responsibility center

  View Answer

  D. Responsibility center

  14. In financial performance measurement most important is ______

  A. ROI

  B. MVA

  C. Profit Margin

  D. EVA

  View Answer

  D. EVA

  15. Efficiency is the ratio of ______.

  A. Profit to loss

  B. Output to input

  C. Cost to sales

  D. Input to output

  View Answer

  B. Output to input

  16. ______ is responsible for establishing a private company’s internal control.

  A. Committee

  B. Auditors

  C. Management

  D. Sponsors

  View Answer

  C. Management

  17. ROI can be calculated as ____

  A. Revenue / Asset employed

  B.Profit / No. of shares outstanding

  C. Income / Asset employed

  D. Cost / Revenue

  View Answer

  C. Income / Asset employed

  18. Capital Budgeting Decisions are _____

  A. for short term

  B. Irreversible

  C. involves small amount

  D. Reversible

  View Answer

  B. Irreversible

  19. Return on Assets and Return on Investment Ratios belong to ______ ratios.

  A. Profitability

  B. Liquidity

  C. Turnover

  D. Solvency

  View Answer

  A. Profitability

   

  20.  _______ is an example of lead indication.

  D. Market share

  A. Net profit

  C. Gross margin

  A. ROI

  View Answer

  D. Market share

  21. _______ is used for performance measurement in an absolute sense.

  A. Coverage

  B. Efficiency

  C. Effectiveness

  D. None of the above

  View Answer

  D. None of the above

   Set -2

   

  1.	Capital Budgeting Decisions are:
  A.	Reversible
  B.	Irreversible
  C.	for short term
  D.	involves small amount
  Answer» B. Irreversible

  2.	Which of the following is not incorporated in Capital Budgeting?
  A.	Tax-Effect
  B.	Time Value of Money
  C.	Required Rate of Return
  D.	Rate of Cash Discount
  Answer» D. Rate of Cash Discount

  3.	PERT / CPM have to be used for proper ……………….. of all projects
  A.	planning
  B.	controlling
  C.	staffing
  D.	coordinating
  Answer» B. controlling

  4.	BSC is important for ………
  A.	creating strategy
  B.	controlling strategy
  C.	evaluating the performance of a strategy
  D.	mapping strategy
  Answer» C. evaluating the performance of a strategy

  5.	Classification of responsibility center is based on the nature of the monetary ……………
  A.	Inputs and/or outputs
  B.	Inputs and outputs
  C.	Inputs only
  D.	Outputs only
  Answer» A. Inputs and/or outputs

  6.	Discretionary expenses are expenses ………
  A.	that do not create value
  B.	that do not hamper the operations immediately
  C.	that are completely unnecessary
  D.	that are necessary
  Answer» B. that do not hamper the operations immediately

  7.	For the board of directors of the company, the entire company is a ……………….
  A.	Profit center
  B.	Expense center
  C.	Responsibility center
  D.	Investment center
  Answer» C. Responsibility center

  8.	In a revenue center the primary measurement is ………………….
  A.	Output in physical terms
  B.	Input in cost terms
  C.	Revenue
  D.	Cost incurred by center
  Answer» C. Revenue

  9.	In case of discretionary expense center, the financial center is primarily exercised at ………. Stage.
  A.	Implementation
  B.	Quality control
  C.	Output

  D.	Planning
  Answer» D. Planning

  10.	In case of revenue center the output is measured in ……………. terms, but no formal attempt is made to relate ……………….
  A.	Physical, quantity and quality
  B.	Monetary, efficiency and effectiveness
  C.	Monetary, input and output
  D.	Monetary, output only
  Answer» C. Monetary, input and output

  11.	In financial performance measurement most important is ……………
  A.	EVA
  B.	ROI
  C.	Profit Margin
  D.	MVA
  Answer» A. EVA

  12.	Performance management is …………….
  A.	Strategic tool
  B.	Re-engineering tool
  C.	Business process
  D.	Strategic management tool
  Answer» C. Business process

  13.	Profit centre profit is calculated ……....
  A.	before debiting Corporate overheads
  B.	after debiting corporate overheads
  C.	without considering corporate overheads
  D.	along with corporate overhead
  Answer» B. after debiting corporate overheads

  14.	A major part of strategy implementation is …….
  A.	Planning
  B.	Communication
  C.	Resource allocation
  D.	Monitoring
  Answer» C. Resource allocation

  15.	The Enterprise Performance Management core processes does not include which of the following?
  A.	Financial Planning
  B.	Operational Planning
  C.	Business Analytics
  D.	Consolidation and Reporting
  Answer» C. Business Analytics

  16.	The Malcolm Baldrige Award is awarded by the Government of ……….
  A.	Japan
  B.	Russia
  C.	U.K.
  D.	U.S.A.
  Answer» D. U.S.A.

  17.	The responsibility center whose inputs are measured in monetary terms, but whose output is not, is ………………..
  A.	Revenue center
  B.	Expense center
  C.	Profit center
  D.	Investment center
  Answer» B. Expense center

   

  18.	Two step transfer prices depend on ……………….
  A.	ROI requirement
  B.	profit requirement
  C.	corporate profit requirement
  D.	SBU profit requirement
  Answer» C. corporate profit requirement

  19.	Which of the following does not belong to the category of quantitative performance indicators?
  A.	Number of
  B.	Proportion of
  C.	Levels of
  D.	Amount of
  Answer» C. Levels of

  20.	Which of the following is correct? ROI =
  A.	Income / Asset employed
  B.	Revenue / Asset employed
  C.	Cost / Revenue
  D.	Profit / No. of shares outstanding
  Answer» A. Income / Asset employed

         

    Questions Bank

  
  

  1. What do managers and employees say about the mechanics of performance management? Is it simple and intuitive? What steps are you willing to take to improve the process?
  2. How well do managers and employees know and accept their roles—for example, who drives goal setting and regular check-ins? How are individuals held accountable?
  3. What tools and training do you offer to help managers gain confidence and credibility in ions?
  4. How often do managers and employees actually talk about performance—formally and informally? Enough that employees know how they’re doing and have the opportunity to improve? Enough that managers can give accurate performance ratings?
  5. How valuable are performance conversations at your organization? How do you measure this value?
  6. If managers and employees aren’t having enough performance conversations or those conversations aren’t valuable, what’s getting in the way? Priorities? Capabilities? Relationships? Accountability?
  7. What qualitative measures best align with how employees work and would encourage performance improvement?
  8. What are the gaps with the current tools?
  9. Do our current vendors offer appropriate solutions?
  10. Do our processes need to be better defined or reinforced?
  11. Do we have our metrics well defined, or shall we work on KPIs?
  12. Does size and location(s) impact the priority and type of tools?
  13. Do we need real-time information in addition to historical views?
  14. What is the budget?
  15. Does front-line leadership need training to drive Performance Management (in addition to any process and tool changes)?
  16. What are other parts of the organization using for Performance Management?
  17. Do we have a defined project implementation process and resources available to support implementation?

  Sample Model Answers

  1.      How do I know if I need EPM?

  We typically begin with an audit of your current tools, applications, and processes to get a sense of where you’re experiencing challenges or inefficiencies. If you’re working with old legacy systems or manual processes, chances are that an investment in a modern EPM solution would have a great ROI for your business, saving you time and allowing you to extract additional value from your data.

  2.      Which solution makes the most sense for my organization?

  At Apps, we partner with Oracle to provide a range of EPM applications, including: Oracle Planning & Budgeting Cloud Service, Oracle Financial Consolidation & Close Cloud, Oracle Hyperion Roadmap and Implementation, EPM Support Services, as well as Advisory Services. Following the audit mentioned above, we’ll have a much better sense of which tools you need and can make a formal recommendation to improve your business performance.

  3.      What does the training and implementation process look like?

  We are big believers that the best way to learn is by doing, which is why our projects are co-built in partnership with our clients’ internal teams. This process ensures the optimum real-life knowledge transfer and training. Formal training will also be conducted to cover the overall tool functionality in the context of what has been implemented.

  We make sure that employee training is part of the change strategy (as we cannot extract value from new tools if no one knows how to use them). An implementation is not considered complete until we have the following guidelines met: 100% user adoption; a solution that is easy for finance to support and enhance; and can align and flex to meet current and future strategies.

  4.      When will my business begin to reap the benefits of EPM software?

  The short answer, immediately! EPM tools are designed to empower the financial side of your organization, contributing to the overall growth of the business. You will see an improvement in your budgeting process, cost and profitability analysis, as well as close time and reporting – a tangible return on your investment. As soon as the solution has been implemented and is in use, your financial and leadership teams will have greater visibility into all of your operational activities, with greater accuracy than ever before.

  5.      What will maintenance look like after the initial implementation, and will there be a need for additional investments?

  Once an implementation has been executed, we track its performance and recommend enhancements as needed. We know that customers are concerned about future costs with a project such as these. EPM solutions that are implemented by Apps are turnkey solutions that your finance team will be able to support and maintain going forward. Any additional investment will only be needed for new implementations or major overhaul of the application. Clients who may have limited resources and bandwidth, may consider signing up for our managed services to ease the burden on their own teams.