paper unit 5

Balanced Scorecard

Industry Results for Quarter: 4
	Minimum	Maximum	Average	Eloquent Bikes 3D
Total Performance	1.607	27.823	8.496	1.607
Financial Performance	10.522	48.597	22.920	16.898
Market Performance	0.167	0.355	0.238	0.210
Marketing Effectiveness	0.648	0.743	0.710	0.648
Investment in Future	5.854	17.655	9.698	5.854
Wealth	0.284	0.764	0.630	0.738
Human Resource Management	0.767	0.849	0.808	0.802
Asset Management	0.497	0.994	0.752	0.647
Manufacturing Productivity	0.496	0.756	0.655	0.496
Financial Risk	0.925	1.000	0.968	1.000
Reputation	0.628	0.695	0.660	0.628

Industry Results for Quarter: 4

Total Performance

The Total Business Performance indicator is a quantitative measure of the executive team's ability to effectively manage the resources of the firm. It considers both the historical performance of the firm as well as how well the firm is positioned to compete in the future. As such, it measures the action potential of the firm. The index employs what is called a balanced scorecard to measure the executive team's performance. The most important measure is the team's financial performance, and thus its ability to create wealth for the investors. However, the focus on current profits has caused many executives to stress the present at the expense of the future. The long-term viability of the firm requires that the executive team be good at managing not only the firm's profitability, but also its marketing activities, production operations, human resources, cash, and financial resources. The management team must also invest in the future. These expenses might depress the current financial performance, but are vital to creating new products, markets, and manufacturing capabilities. In short, top managers must be good at managing all aspects of the firm. The balanced scorecard puts this perspective into practice. It focuses attention on multiple performance measures, and thus multiple decision areas. None can be ignored or downplayed. The best managers will be strong in all areas measured. The Total Business Performance measure is computed by multiplying several indicators of business performance. This model underscores the importance of all measures. This is because any strength or weakness will have multiple effects on the final outcome, the Action Potential of the Firm. The following is a summary of the measure of the firm's Total Business Performance and its key performance indicators. The computational details follow. Note that a negative score in any of these indicators will result in a Total Performance of "0".

Primary Segment: Recreation Secondary Segment: Speed

Total Performance = Financial Performance * Market Performance * Marketing Effectiveness * Investment in Future * Wealth * Human Resource Management * Asset Management * Manufacturing Productivity * Financial Risk * Reputation = 16.898 * 0.210 * 0.648 * 5.854 * 0.738 * 0.802 * 0.647 * 0.496 * 1.000 * 0.628 = 1.607

Financial Performance: 16.898

Market Performance: 0.210

Marketing Effectiveness: 0.648

Investment in Future: 5.854

Wealth: 0.738

Human Resource Management: 0.802

Asset Management: 0.647

Manufacturing Productivity: 0.496

Financial Risk: 1.000

Reputation: 0.628

Financial Performance

measures how well the executive team has been able to create profits for its shareholders. A positive number is always desired and the larger the better. It is computed in three steps. First, a measure of the company's profitability is computed by taking the average of your gross profit and your net profit from operations. The gross profit is the company's revenue minus the costs of making your products. It is computed subtracting rebates and the cost of the goods sold from total revenues. Gross profit measures how efficiently you produce revenue. The net profit from operations is computed by taking the operating profit shown in the income statement and adding back investments in the future that are expensed in the current quarter. It measures how well the managers are able to create revenue from the current quarter's marketing, sales and manufacturing activities.  Note that the income statement also includes investments that will benefit your firm's future (referred to as 'Investment in Future' in the balanced scorecard). Because these expenses will help you to create new business opportunities, they are added back to the operating profit so that the financial performance measure is entirely focused on current quarter revenues and expenses.  Second, the total number of shares of stock is computed by adding all forms of equity investment. If an emergency loan has been taken out, shares of stock will automatically be issued to the loan shark and they become a permanent part of the equity financing.  Third, the average of your gross profit and your net profit from current operations is divided by the number of shares of stock issued to determine the profitability per share of stock.

Financial Performance = ( Net Profit from Current Operations + Gross Profit ) / 2 / Total Shares Issued = ( 421,586 + 1,268,243 ) / 2 / 50,000 = 16.90

Net Profit from Current Operations = Operating Profit + Investments in Firm's Future = -1,055,039 + 1,476,625 = 421,586

Operating Profit = Gross Profit - Total Expenses = 1,268,243 - 2,323,282 = -1,055,039

Gross Profit: 1,268,243

Total Expenses: 2,323,282

Investments in Firm's Future = Cost to Open New Stores + R&D Investment in New Brand Features and New Brands + R&D Licenses + System Improvements + Depreciation = 84,000 + 1,053,325 + 0 + 249,300 + 90,000 = 1,476,625

Cost to Open New Stores: 84,000

R&D Investment in New Brand Features and New Brands: 1,053,325

R&D Licenses: 0

System Improvements: 249,300

Depreciation: 90,000

Gross Profit: 1,268,243

Total Shares Issued = Number of Shares Issued to Executive Team + Number of Shares Issued to Venture Capitalists + Number of Shares Issued to Loan Shark = 25,000 + 25,000 + 0 = 50,000

Number of Shares Issued to Executive Team: 25,000

Number of Shares Issued to Venture Capitalists: 25,000

Number of Shares Issued to Loan Shark: 0

Market Performance

is a measure of how well the managers are able to create demand in their primary and secondary segments. The firm's market share in two target segments is used to measure this demand creation ability. The market share score is adjusted downwards if there were any stock-outs. This penalty for stock-outs is to underscore two points. First, unnecessary resources have been spent to generate more demand than can be satisfied. Second, ill will has been created by having potential customers become frustrated when they do not find the products that they have been persuaded to buy. The score ranges from 0 to 1.0 and will depend upon the number of competitors. If there are 3 firms, a good score would be greater than 0.5. If there are 8 teams, a good score would be greater than 0.35.

Market Performance = ( Average Market Share in Targeted Segments / 100 ) * ( Percent of Demand Actually Served / 100 ) = ( 21 / 100 ) * ( 100 / 100 ) = 0.21

Average Market Share in Targeted Segments = ( Market Share in Primary Segment + Market Share in Secondary Segment ) / 2 = ( 12 + 30 ) / 2 = 21

Market Share in Primary Segment: 12

Market Share in Secondary Segment: 30

Percent of Demand Actually Served = ( ( Total Net Demand - Number of Stock-outs ) / Total Net Demand ) * 100 = ( ( 2,373 - 0 ) / 2,373 ) * 100 = 100

Total Net Demand: 2,373

Number of Stock-outs: 0

Marketing Effectiveness

is a measure of how well the managers have been able to satisfy the needs of the customers as measured by the quality of their brands and ads. Customer perceptions of the firm's brands and ads in its primary and secondary segments are used to measure customer satisfaction. The two scores are then averaged to obtain the indicator for marketing effectiveness. The score ranges from 0 to 1.0. A good score would be greater than 0.8.

Marketing Effectiveness = ( Average Brand Judgment / 100 + Average Ad Judgment / 100 ) / 2 = ( 65 / 100 + 65 / 100 ) / 2 = 0.65

Average Brand Judgment = ( Highest Brand Judgment in Primary Segment + Highest Brand Judgment in Secondary Segment ) / 2 = ( 58 + 72 ) / 2 = 65

Highest Brand Judgment in Primary Segment: 58

Highest Brand Judgment in Secondary Segment: 72

Average Ad Judgment = ( Highest Ad Judgment in Primary Segment + Highest Ad Judgment in Secondary Segment ) / 2 = ( 68 + 61 ) / 2 = 65

Highest Ad Judgment in Primary Segment: 68

Highest Ad Judgment in Secondary Segment: 61

Investment in Future

reflects the willingness of the executive team to spend current revenues on future business opportunities and goodwill. These investments are also the most tangible way to measure the executive team's allegiance to Conscious Capitalism. Investments in the future are necessary for the long-term viability of the firm, but risky. In the short-term, these expenditures can cause large negative profits on the income statement. As a result, the retained earnings may become highly negative, thus indicating that a substantial portion of the stockholder's investment has disappeared into the operations of the firm. In the long-term, these investments are absolutely necessary if the firm is to thrive and be competitive. Thus, there is a need to balance the loss of stockholder's equity against investments that could create even greater returns for the investors in the future. The score is always greater or equal to 1.0 and a good score would be greater than 3.0.

Investment in Future = ( Cumulative Expenses that Benefit Firm's Future / Cumulative Net Revenues ) * 10 + 1 = ( 2,363,295 / 4,869,200 ) * 10 + 1 = 5.85

Cumulative Expenses that Benefit Firm's Future = Cumulative Cost to Open New Stores + Cumulative R&D Investment in New Brand Features and New Brands + Cumulative R&D Licenses + Cumulative System Improvements + Cumulative Depreciation = 510,000 + 1,203,325 + 0 + 469,970 + 180,000 = 2,363,295

Cumulative Cost to Open New Stores: 510,000

Cumulative R&D Investment in New Brand Features and New Brands: 1,203,325

Cumulative R&D Licenses: 0

Cumulative System Improvements: 469,970

Cumulative Depreciation: 180,000

Cumulative Net Revenues = Cumulative Sales Revenue - Cumulative Rebates = 5,225,600 - 356,400 = 4,869,200

Cumulative Sales Revenue: 5,225,600

Cumulative Rebates: 356,400

Wealth

is a measure of how well the executive team has been able to add wealth to the initial investments of the stockholders. During the start-up phase of the company, it is expected that expenses can exceed revenues leading to losses and retained earnings figures that are negative. To compute the creation of wealth measure, the net equity of the firm is first computed by adding the retained earnings to the total of the investments from all of the stockholders. The retained earnings figure is the sum of all profits from the inception of the firm. As noted above, the retained earnings will be negative in the early quarters as the firm invests money to start up and grow the business. Next, the net equity is divided by the total of all equity investments to obtain a ratio of wealth creation. A value of zero or less indicates bankruptcy. A value greater than zero and less than one indicates the executive team is relying upon the initial stockholder's investments to pay day-to-day expenses plus invest in the future. A value greater than one indicates the firm is adding wealth to the stockholders.

Wealth = Net Equity / Total Stockholders Equity = 3,691,830 / 5,000,000 = 0.74

Net Equity = Retained Earnings + Common Stock = -1,308,170 + 5,000,000 = 3,691,830

Retained Earnings: -1,308,170

Common Stock: 5,000,000

Total Stockholders Equity = Common Stock = 5,000,000 = 5,000,000

Common Stock: 5,000,000

Human Resource Management

is a measure of how well the executive team is able to recruit the best employees, satisfy their needs and motivate them to excel. The measure is based upon employee satisfaction with compensation, employee turnover, and employee morale. The three values are averaged together to obtain a single score. The score ranges from zero to 1.00 and a good score would be greater than 0.80. Employee satisfaction with the firm's compensation packages is measured by computing the average satisfaction for production supervisors, production workers, and sales force people. High performance is only possible if the firm's compensation packages are competitive and in tune with what is important to employees over time. Employee turnover is a measure of the percent of production workers who quit or are fired. When workers leave for any reason, production productivity goes down and costs go up. The effect of employee turnover on human resources is computed by subtracting employee turnover from 100. The difference is a measure of employee retention, a number that should improve over time. Employee morale is driven by how good the employees feel about the things they produce and the company for which they work. Morale will increase to the extent that the firm produces good quality products, has genuine concern for the employees, has integrity, and is a good corporate citizen.

Human Resource Management = ( Employee Compensation Satisfaction / 100 + ( 100 - Employee Turnover ) / 100 + Employee Morale / 100 ) / 3 = ( 85.02 / 100 + ( 100 - 14 ) / 100 + 69 / 100 ) / 3 = 0.80

Employee Compensation Satisfaction = ( Production Supervisor Compensation Satisfaction + Production Worker Compensation Satisfaction + Sales Force Compensation Satisfaction ) / 3 = ( 92 + 83 + 81 ) / 3 = 85.02

Production Supervisor Compensation Satisfaction: 92

Production Worker Compensation Satisfaction: 83

Sales Force Compensation Satisfaction: 81

Employee Turnover: 14

Employee Morale: 69

Asset Management

is a measure of the executive team's ability to use the firm's assets to create sales revenue. Asset management is measured by computing the asset turnover of the firm. Effective managers are able to use the assets to create sales which are at least equal to the value of the assets. Thus, a very good score would be 1.0.

Asset Management = Asset Turnover = 0.65

Asset Turnover = Net Revenues / Total Assets = 2,389,500 / 3,691,830 = 0.65

Net Revenues = Sales Revenue - Rebates + Interest Income = 2,518,500 - 129,000 + 0 = 2,389,500

Sales Revenue: 2,518,500

Rebates: 129,000

Interest Income: 0

Total Assets: 3,691,830

Manufacturing Productivity

measures the executive team's ability to efficiently create reliable products. Reliable products are a high priority of all customers and thus it is the first measure of manufacturing productivity. To achieve a reliable manufacturing process, the managers will have to invest money to study and then improve upon the production processes. It is a multi-step process that takes time and considerable resources as part of a system improvement program. The second measure of productivity focuses the efficiency of production scheduling. Specifically, how much of the operating capacity is actually used in production versus that portion lost due to excess capacity. Excess capacity costs occur when the production facility is scheduled to produce more units than is needed to meet demand. Good forecasting and production scheduling will reduce penalties for excess capacity. The third measure of productivity is how much overtime is required to meet demand. Overtime indicates that the effective operating capacity was insufficient to meet demand. As a result, the employees had to work beyond the normal workday, resulting in additional fatigue and expense. The penalty is equal to one-half (50%) of the overtime required. The score ranges from 0.0 to 1.0. A very good score would be 0.80.

Manufacturing Productivity = ( Reliability Judgment / 100 ) * ( ( Percent of Operating Capacity Used in Production / 100 ) - ( Overtime as Percent of Operating Capacity Used / 2 / 100 ) ) = ( 77 / 100 ) * ( ( 64 / 100 ) - ( 0 / 2 / 100 ) ) = 0.50

Reliability Judgment: 77

Percent of Operating Capacity Used in Production = ( Total Effective Operating Capacity / Operating Capacity Scheduled ) * 100 = ( 2,373 / 3,681 ) * 100 = 64

Total Effective Operating Capacity: 2,373

Operating Capacity Scheduled: 3,681

Overtime as Percent of Operating Capacity Used: 0

Financial Risk

measures the executive team's ability to manage debt as a financial resource. The financial risk indicator is based upon the degree to which debt is part of the capital of the firm. As debt increases relative to the total capital, then the financial risk associated with the company increases. Conversely, as the proportion of equity in the total capital increases, then the perceived financial risk in the firm decreases. To compute financial risk, the proportion of equity is obtained by computing the amount of equity in the firm and dividing it by the amount of capital invested in the firm from all sources. Specifically, the amount of equity is equal to the sum of common stock plus retained earnings. The amount of capital is equal to the sum of debt plus common stock plus retained earnings. As the ratio of equity to capital decreases (meaning more debt), then financial risk increases. A value of 1.00 would indicate there is no debt and, therefore, no perceived financial risk. It is important to realize that financial managers do not want to totally discourage debt. The optimum capital structure will vary by firm depending on its tax situation, overall risk, asset base, and financial slack. Some debt may be desirable in order to help the firm take advantage of value enhancing business opportunities (i.e., opportunities that earn more than the company's weighted average cost of capital). In order to mitigate or downplay the effect of low amounts of debt in the capital structure, the value for the share of equity in the company is raised to a power of 0.5 (square root). Thus, if debt represented 20% of the capital structure, then the Financial risk indicator would be 0.89 (0.80 ^ 0.5). If debt were 50% of the capital structure, the Financial Risk indicator would be 0.71. A Financial Risk indicator below 0.80 (more than 36% debt) would be considered unfavorable.

Financial Risk = ( Total Equity / Total Capital ) ^ 0.5 = ( 3,691,830 / 3,691,830 ) ^ 0.5 = 1.00

Total Equity = Common Stock + Retained Earnings = 5,000,000 + -1,308,170 = 3,691,830

Common Stock: 5,000,000

Retained Earnings: -1,308,170

Total Capital = Common Stock + Retained Earnings + Debt = 5,000,000 + -1,308,170 + 0 = 3,691,830

Common Stock: 5,000,000

Retained Earnings: -1,308,170

Debt: 0

Reputation

reflects the amount of esteem that your firm has earned in the eyes of its customers, employees, suppliers, investors, competitors and community. To be held in high esteem, your executive team must be reliable, credible, trustworthy and responsible. A firm that is held in high esteem is more likely to have greater goodwill and higher sales. Your reputation is a subjectively determined measure obtained by surveying all of your stakeholders. It ranges from 0.0 to 100. It takes time to develop a good reputation. Starting out in the 60s, a good score would be in the high 70s by the end of 6 quarters of business.

Reputation = Reputation Score from the Stakeholder Survey / 100 = 63 / 100 = 0.63

Reputation Score from the Stakeholder Survey: 63