Financial Management Report
Renaaz
MBA4032021Week7.pdf
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MBA403 FINANCIAL AND ECONOMIC
INTERPRETATION AND COMMUNICATION
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Week 7:
NON-FINANCIAL BUSINESS PERFORMANCE
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Week 7:
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvass
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INTERPRETATION
ANALYSIS
INSIGHTS
COMMUNICATION
PURPOSE OF NON-FINANCIAL DATA
“In the new economy, information, education, and motivation are everything”
(Bill Clinton)
FINANCIAL STATEMENTS
SUSTAINABILTY REPORTS
EXTERNAL SOURCES OF
INFORMATION
BUSINESS STRATEGY
DECISION MAKING
STAKEHOLDER ENGAGEMENT
NON- FINANCIAL
DATA
ECONOMIC & BUSINESS
ENVIRONMENT
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NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
The Balance Sheet Explained
LIMITATIONS OF FINANCIAL NUMBERS
• Financials focus more on the past than the future (or on outcomes rather than causes)
• May encourage a short term or narrow focus (at the expense of long term performance)
• Do not reveal how business is done – sustainably, ethically, responsibly
• Often conceal aspects such as efficiency or innovation
• May not indicate the appropriate management actions or business strategy
Note: this is not an exhaustive list
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IMPORTANCE OF NON-FINANCIAL INFORMATION
Non-Financial information can help to answer questions such as:
• Are our customers satisfied?
• Are we meeting objectives for product quality and service?
• Is the team engaged?
• Is our business strategy succeeding?
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
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IMPORTANCE OF NON-FINANCIAL INFORMATION
• Non-financial measures can reflect the company’s business operations and strategy (example: website visits for an e- commerce business)
• Are often more timely to compile and report on (particularly valuable in a rapidly changing business environment)
• May be a superior guide to future profitability (tomorrow’s financial performance may be driven by today’s non- financial performance)
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
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IMPORTANCE OF NON-FINANCIAL INFORMATION
• Can identify areas of strength and quantify intangible assets such as intellectual capital or customer loyalty
• May help to identify specific areas of risk or poor performance and the actions required to drive improvement
• Can be easier to communicate and understand than financials (internally and externally)
• Is increasingly required by regulators, boards, shareholders and other stakeholders
Note: this is not an exhaustive list
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
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EXPLORE WOOLWORTH’S
ANNUAL REPORT FOR NON- FINANCIAL MEASURES
LIABILITIES
• Explore the FY20 Annual Report for key non-financial measures reported by Woolworths. Review the following areas of the annual report:
o Our impact (p2)
o Living our purpose and operating COVIDSafe (p4)
o Our key priorities (p6)
o Sustainability highlights (p10)
o Chairman’s report (p12)
o CEO’s report (p14)
• List a number of measures
• Discuss and share
CASE STUDY
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EXPLORE WOOLWORTH’S
ANNUAL REPORT FOR NON- FINANCIAL MEASURES
LIABILITIES
• p2: Customers: Net Promoter Score 57, from 55 a year earlier (a measure of customer loyalty)
• p3: Environment: solar power generation up 54% on a year earlier
• p6: Online: $3.5bn in online sales in FY20
• p6: Product: 131 new Fresh Made Easy products launched in FY20
• p7: Stores: 29 (net) new stores opened during the year
• p12: Team: 80% engagement score (a measure of employee satisfaction)
Note: this is not an exhaustive list
CASE STUDY: Examples
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NON-FINANCIAL INFORMATION
CONSIDER SOURCES OF NON-FINANCIAL INFORMATION AND HOW FINANCIALS CAN, AT TIMES, BE
MISLEADING
LIABILITIES
Topic 1: We’ve referred to the Annual Report but what other sources of non-financial information could we use for companies of interest?
Topic 2: Recent Government policy seeks to encourage business investment. Consider the policy below from the FY20 Commonwealth Budget. How do you expect the policy to affect short term versus long term business profitability?
DISCUSSION
“From 6 October 2020 until 30 June 2022, businesses with turnover up to $5 billion will be able to deduct the full cost of eligible depreciable assets of any value in the year they are first used or installed ready for use”
(source: budget.gov.au)
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NON-FINANCIAL INFORMATION
CONSIDER SOURCES OF NON-FINANCIAL INFORMATION AND HOW FINANCIALS CAN, AT TIMES, BE
MISLEADING
LIABILITIES
Topic 1: Media and news outlets, external analysts, ratings agencies, ASX announcements, survey data
Example (ZDNet and Refinitiv, 9th October 2020):
Woolworths speeds up online grocery orders with automated fulfilment technology
According to Woolworths Group CEO Brad Banducci, automating the picking of products will help dispatch five times the online order volume of a standard Woolworths store.
Topic 2: Investment incentives which allow full, immediate expensing (for tax reduction purposes) will lower reported profit in the current period but boost future profitability (assuming the investment proves successful).
DISCUSSION: Answers
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VIDEO: The Balanced Scorecard Explained
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
THE BALANCED SCORECARD
”Measures that Drive Performance”*
The Balanced Scorecard is a strategic performance management tool devised by Dr Robert Kaplan and Dr David Norton and published in the Harvard Business Review. In summary, the Balanced Scorecard:
• Translates an organisation’s vision and strategy into a set of performance measures (financial and non-financial) “that gives top managers a fast but comprehensive view of the business”
• Incorporates operational measures that are the drivers of future financial performance; that is leading indicators that are actionable
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The Balanced Scorecard Explained
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
THE BALANCED SCORECARD
”Measures that Drive Performance”*
The Balanced Scorecard enables management to look at the business from 4 Perspectives:
1. Financial perspective. How do we look to shareholders?
Indicators relating to sales, costs, profitability, shareholder value, cash flow and financial ratios
These tend to be backward looking or lagging indicators
2. Customer perspective. How do customers see us?
Measures the company’s success in achieving customer value
May include market share, number of new customers, Net Promoter Score, customer service metrics
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NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
THE BALANCED SCORECARD
”Measures that Drive Performance”*
3. Internal Business Processes perspective. What must we excel at?
What are the core competencies needed? May include measures of productivity (output per unit of input) or efficiency, product defects, safety statistics
4. Learning and Growth perspective. Can we continue to improve and create value?
Focuses on long term growth, covering aspects including innovation, investment, the pipeline of new products or services, employee satisfaction, workforce skills and development
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VIDEO:
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
THE BALANCED SCORECARD
”Measures that Drive Performance”*
The Balanced Scorecard can be used to not only monitor the performance of the business but to assess the performance of executives and team members
It helps to align individual responsibilities with the organisation’s vision and strategy
The following slides provide an example.
*Kaplan, R.S & Norton, D.P, “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, Jan-Feb 1992 issue (available in KBS library or https://hbr.org/1992/01/the-balanced-scorecard-measures- that-drive-performance-2)
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EXAMPLE BALANCED SCORECARD
Position: Investment Portfolio Manager
Deliver Profit and Shareholder Return Target (40%):
- 1 yr and 3 yr investment returns on target (% pa)
- Team budget and headcount on target ($, No.)
Create Value for Customers (20%):
- Effective stakeholder engagement (subjective)
- Deliver excellent client service (Net Promoter Score)
- Provide high quality reporting (subjective)
FINANCIAL
CUSTOMER
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EXAMPLE BALANCED SCORECARD
Position: Investment Portfolio Manager
Manage risk within agreed parameters (20%)
- Effective risk management ($)
- Compliance obligations met (/ 𝑥)
Drive a positive culture & engaged workforce (20%)
- Maintain / improve team engagement score (No.)
- Team learning and development (% undertaking additional study)
INTERNAL BUSINESS PROCESSES
LEARNING AND GROWTH
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BALANCED SCORECARD EVIDENCE *
“It is estimated that 70% of organisations use the balanced scorecard approach to management”
“BSC companies achieved 3-year growth in shareholder value of 45% compared with only 15% for non-BSC managed companies”
“Balanced Scorecard Hall of Fame companies .. showed an average 3-year growth in shareholder value of 150%”
* Kaplan, R.S & Norton, D.P, The Palgrave Encyclopedia
of Strategic Management (2018), p 80-84
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Whether reported as a Balanced Scorecard or another way, there are important considerations in the choice of non-financial measures.
• Non-Financial data should not require great time or cost to compile
• Measures should be within management’s control rather than subject to external influences
• A limited number of metrics is preferred to many (which may at times be conflicting)
• The measures must have a clear link to future business success
• The focus must be on achieving strategic goals, rather than mechanistically pursuing non-financial targets
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
NON-FINANCIAL PERFORMANCE MEASURES
”What Works and What Doesn’t”*
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NON-FINANCIAL BUSINESS
MEASURES FOR TWO VERY DIFFERENT
BUSINESSES IN THE SAME SECTOR
LIABILITIES
In selecting non-financial measures, most important is to understand your business model:
“The starting point is understanding a company’s value drivers, the factors that create stakeholder value. Once known, these factors determine which measures
contribute to long-term success.”*
For Ferrari and Toyota consider how the non-financial measures management considers important may differ.
Can you suggest examples that they may compile data on?
NON-FINANCIAL MEASURES ACTIVITY
* Ittner, C & Larcker, D, “Non-financial Performance Measures: What Works and What Doesn’t”, https://knowledge.wharton.upenn.edu/article/non- financial-performance-measures-what-works-and-what-doesnt/
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THE BUSINESS MODEL
What is a Business Model?
There are many definitions yet the following are the essential features:
• A business model is “conceptual, rather than financial”
• “is not a spreadsheet or computer model”
• A business model depicts or describes how “the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit” *
* Teece, D.J., “Business Models, Business Strategy and Innovation”, Long Range Planning 43, 2010, p 172-194.
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
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VIDEO: The Business Model Canvas for
NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
The Business Model Canvas is based on the work of Osterwalder and Pigneur (2010).
It can be thought of as a ‘one page business plan’ that presents a business model in the form of “nine basic building blocks that show the logic of how a company intends to make money“*
*Osterwalder, A. & Pigneur, Y., “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers”, 2010.
THE BUSINESS MODEL CANVAS
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Source: https://en.wikipedia.org/wiki/Business_Model_Canvas
KEY PARTNERS
• Who are our Key Partners?
• Who are our key suppliers?
VALUE PROPOSITIONS
• What value do we deliver to the customer?
• What problems are we solving or needs are we satisfying?
• What products and services are we offering to each Customer Segment?
CUSTOMER RELATIONSHIPS
• The relationships our Customer Segments expect us to have with them
CHANNELS
• The Channels by which customers are reached
• Which Channels are most efficient?
KEY RESOURCES
• The resources required for our Value Propositions, Distribution, Customers, Revenues
KEY ACTIVITIES
• The activities required for our Value Propositions, Distribution, Customers, Revenues
CUSTOMER SEGMENTS
• Who are we creating value for?
• Who are our most important customers?
REVENUE STREAMS
• What are our customers willing to pay for?
• How are they currently paying and how would they prefer to pay?
• How much does each Revenue Stream contribute to overall revenues?
COST STRUCTURE
• What are our most important costs?
• Which Key Resources and Key Activities are most expensive?
THE BUSINESS MODEL CANVAS
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NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
The 9 building blocks of the Business Model Canvas:
1. Value Propositions. The reason why customers turn to our business over a competitor. This may include the performance, innovation, price, design and status of the product or service.
2. Customer Segments. The different groups of people or organisations the company aims to reach and serve. For example, is it a mass market or niche offering?
3. Customer Relationships. How does the business interact with customers. Is it a relationship based on personal service or is it self-service / automated?
THE BUSINESS MODEL CANVAS
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NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
The 9 building blocks of the Business Model Canvas:
4. Channels. How a customer communicates with and reaches its Customer Segments. This includes developing awareness, assisting customers, capturing sales and providing support.
5. Revenue Streams. How do we generate revenues? For example, through sales, rentals, a subscription service or a licensing arrangement? What is the pricing model?
6. Key Resources. The resources of the company may be physical, financial, system-based, human or intellectual (includes brands, proprietary knowledge, patents and databases).
THE BUSINESS MODEL CANVAS
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NON-FINANCIAL BUSINESS
PERFORMANCE
• Non-Financial Information
• The Balanced Scorecard
• The Business Model Canvas
The 9 building blocks of the Business Model Canvas:
7. Key Activities. The most important actions a company must take to operate successfully. They may involve production or problem solving or be technology based.
8. Key Partners. A business’s supply chain may provide resources and activities. Suppliers can help to reduce costs by accessing economies of scale. Service providers can also help to reduce risk and uncertainty.
9. Cost Structure. Is the business pursuing a low-cost strategy or one based on value and differentiation? Is the cost structure primarily fixed or variable?
THE BUSINESS MODEL CANVAS
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POPULATE A SIMPLE BUSINESS MODEL
CANVAS FOR UBER
LIABILITIES
BUSINESS MODEL CANVAS
ACTIVITY
• In groups, populate a simple Business Model Canvas for Uber, based on your understanding of the company
• Discuss and share
Uber’s mission:
“We ignite opportunity by setting the world in motion”
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POPULATE A SIMPLE BUSINESS MODEL
CANVAS FOR UBER
LIABILITIES
BUSINESS MODEL CANVAS
ACTIVITY BUSINESS MODEL CANVAS
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Next Workshop:
BUSINESS ETHICS AND SUSTAINABILITY
