accounting ROI help
flyry80
discussion_questions.docx1)
A company that provides training, certification and consulting services to commercial, government, and non-profit organizations in applying best practices in balanced scorecard (BSC), strategic performance management and measurement, and transformation and change management has a customer success story on its website at http://www.balancedscorecard.org/Home/tabid/36/Default.aspx. Click on the Award for Excellence link (on the right-side of the page) and read the story about Mecklenburg County, which successfully transformed the county government and positioned it for tough times. Summarize the success story and explain how it relates to what you have learned in this course this week.
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Your uncle is working in a company managing their investment center. You approach him with the sales of a large piece of equipment that can help the company save money in the end. Your uncle explains to you that they can’t purchase the equipment because they don’t want their ROI to decrease in value. What will be your persuasive argument to help them see more possibilities?
Notes from readings
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Return on Investment (ROI) and Residual Income |
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Costs and segment reporting can be important areas to measure management performance with, but this is not enough to evaluate the investment manager’s performance. There are a couple of methods to do this effectively, and they include the return on investment (ROI) formula and residual income. These are covered below: Return on investment = Net operating income / Average operating assets Net operating income is income before taxes and interest. Average operating assets include cash, accounts receivable, inventory and property, plant and equipment, as well as other assets used in operations. We can expand the ROI formula out to give us more pieces and the ability to identify problem areas we can improve. That formula is: ROI = (Net operating income / Sales) x (Sales / Average operating assets) This will help us more easily see what needs to be fixed. The higher the ROI number the better so management will strive to have this income as high as possible and often will examine this ratio before decisions are finalized. If the ROI doesn’t increase because of the proposal, it makes it much harder to justify. Also, we call the first formula the margin and the second formula the turnover. Residual income is another measure to evaluate segment’s performance. This measure motivates managers to look for profitable investments that would be rejected based on ROI. Residual income = Net income – (Average operating assets x Minimum required rate of return) This method doesn’t necessarily discourage management from making new investment decisions. We are just looking at how much they exceed our expected minimum return. |
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Balanced Scorecard |
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The balanced scorecard is an integrated set of performance measurements that ties together knowledge of strategy, processes, activities, and operational and strategic performance measures. Balanced scorecard models offer great opportunities and challenges to improve value and performance through better communication, knowledge, and incentives. These models translate company’s strategy into performance measures that employees can understand and influence. The balanced scorecard is comprised of four perspectives including financial performance, learning and growth, customers, and internal processes. While the balanced scorecard is a beneficial tool, there are a number of pitfalls to be avoided in its implementation. First, the use of too many measures diffuses management’s focus, and too few measures provide an incomplete picture. To implement such a tool, senior management’s full commitment is necessary. Support from the top is required for success. Additionally, scorecard responsibilities must filter down to middle managers and lower-level workers. Everyone in the organization needs to be on board. Any attempt to develop the perfect scorecard is likely to end in failure. Instead, it should be an evolutionary process. Finally, the balanced scorecard should not be treated as a systems project. While information is an essential part of the scorecard process, mere automation of data recording and observations does not provide a sound basis for a scorecard. Let’s take a closer look at the four perspectives: Financial performance: goals of the company tied to the financial rewards Customer: goals related to the customer, for example, customer satisfaction or number of new customers Internal business processes: processes that happen in house such as assembling the product Learning and growth: focuses on areas related to improvement and changing internally There are specific performance measures that we can use to measure internal business processes. The first one of these is the delivery cycle time—the amount of time it takes from the receiving of the order to the order being shipped. Throughput time is another one, and this is the amount of time required to convert raw materials into the finished product. The throughput time will always be less than the delivery cycle time, because the throughout put time is one piece of the time it takes to completely turn around an order. Manufacturing cycle efficiency (MCE) is the relationship between the value-added time and the throughput in terms of a ratio. Throughput time includes everything once production has started until it ships. Value added time is time a customer is willing to pay for, so process time is all that is considered value added.
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