5 to 7-page reflective paper summarizing your current and/or personal philosophy on performance measurement. It is to be double spaced, no cover sheet, 12 point Times New Roman and should reference class readings and activities (4 to 6 hours). You do not need a reference section if you are using the class readings that your instructor is familiar with.
A performance measurement gives us a numeric outcome of an analysis that shows or indicates how efficiently an organization is achieving its objectives. These measurements technique can be used to gauge the performance of different aspects of a business, including accounting, engineering, finance, marketing, materials management, production, research, and sales departments. For Example:
- It can help us to track the ability of the accounting department to collect overdue accounts receivable i.e. account receivable turnover.
- It can help us in tracking the speed of the engineering department in designing new products.
- It can help us in tracking the liquidity of funds available to the finance department.
- It can help us in tracking the amount of inventory maintained by the materials management department i.e. inventory turnover.
- It can help us in tracking the amount of scrap produced in the production department
- It can help us in tracking the ability of the sales staff to bring in new sales from existing customers i.e. the efficiency of the salesforce.
Production cycle time the amount of time required to turn raw materials into completed products from the time raw materials are received to the time goods are transferred to finished goods inventory. In some cases, defective products are reworked before being transferred to finished goods that are considered as rework time in cycle time.
Delivery cycle time is the amount of time required to get the finished product to the customer (from customer order receipt to the time the goods are shipped); it will also include the wait time between order receipt and the start of production as well as production cycle time.
Rework time is the amount of time necessary to correct for defects found in products by product inspectors. The consulting department accounted for rework time separately from original work time; as such, rework time was not incorporated into the direct labor time variance.
The dashboard of performance measurements containing the summary sheet that will be distributed to the management team regularly. The shortfall in any department will attract the attention of management and a quick enhancement action can be taken.
Another way of performance measurement is the use of revenue centers, profit centers, and cost centers to measure the efficiency of different business segments. A revenue center is responsible solely for the amount of revenue it generates, while a profit center is responsible for both the revenues it generates and the costs it incurs. A cost center is only responsible for the costs it incurs. Nearly all parts of a business can be broken down into one of these classifications.
The basic objective of performance management is :
1. Analyze standard cost variance results and identify the causes.
2. Analyze changes in non-financial operating measures and Identify the causes.
3. It helps us to understand the importance of aligning performance measurement with organizational vision and strategy.
4. We will be able to apply balanced scorecard concepts to evaluate an existing performance measurement system.
5. It will help us to understand the benefits of the balanced scorecard approach to performance management.
6. It helps us to articulate an organization’s business vision and strategy and after that, we can construct a balanced scorecard based on it.
7. We can effectively communicate the results of an analysis in a standard way that management can understand and take required measures.
Effective performance measurement helps us in ensuring that the strategy of an organization is successfully implemented. It monitors the organization’s effectiveness in reaching its own predetermined goals or stakeholder requirements. A company needs to perform in all aspects from cost, quality, flexibility, value to other dimensions. A performance measurement system that makes a company capable to meet these demands successfully is essential. It helps management to make better and informed and more effective decisions at both strategic and operational levels. Performance measurement is not only about purely financial performance measures like profit, cash flow or the return on capital employed (ROCE), now it emphasizes non-financial and multidimensional performance to achieve its organization’s goals. Due to drawbacks and inefficiency in traditional (financial) performance measurement have led to enhanced measurement techniques to understand the functioning of the company better on all its pillars.
Some of these are the Balanced Scorecard, which is based on four distinct perspectives (financial, customer, internal process, and learning and growth). These perspectives cover the whole of the organization’s activities both internally and externally, both current and future.
A balanced scorecard is a performance measurement metrics used in strategic management to identify and enhance the internal functions of a business and outcome attributing to external factors. It provides the tools and feedback to organizations to enhance its activity pertaining to the management of the operation of the business. Data collection and interpretation provide quantitative results that form the backbone of management and executive decision regarding the operation of the company.
The balanced scorecard reinforces good behaviors in an organization by isolating four separate areas or also called legs that learning and growth, business processes, customers, and finance. The balanced scorecard helps us to attain objectives, measurements, initiatives, and goals that are outcome of the four pillars of the balanced scorecard. This helps the company to easily identify factors that hinder company performance and make strategic changes as required based on future scorecards. A balanced scorecard enables them to look at the company as a whole when viewing company objectives. An organization may use the balanced scorecard to implement strategy mapping to see where value is added within an organization as a result of strategy implementation. A company also utilizes a balanced scorecard to develop strategic initiatives and strategic objectives.
The Four Legs of the Balanced Scorecard
Information in a balanced scorecard is consisting of four aspects of a business. First, learning and growth are analyzed through the investigation of training and knowledge resources and then they are analyzed.
This first pillar deals with how well information is captured and how efficiently employees utilize the information to convert it to a competitive advantage over the industry.
Second, business processes are then evaluated by investigating the process and quality products are manufactured. Operational management is analyzed to identify any gaps, delays, bottlenecks, shortages or waste.
Third, customer perspectives are collected to understand customer satisfaction with quality, price, and availability of products or services. The feedback of the customers are taken in regard to their needs are being met with current products.
Finally, financial data like sales, expenditures, and income are analyzed to understand financial performance. These financial measures may include dollar amounts, financial ratios, budget variances or income targets.
These four legs encompass the vision and strategy of an organization and need the attention of the management to analyze the data collected. Therefore, the balanced scorecard is a very important management tool, but not only a measurement tool.
Performance measurement is an important tool of strategic analysis and it also helps stakeholders of the company to understand an organization’s strategy from observing the match of goals and actions of the company.
Performance measurement is applicable to every industry sector and to types of the firm whether small or large and sizes, public or private and for-profit or not-for-profit. Management accountant plays an important role in providing decision making information for performance measurement and helps to development or refining of performance measurement systems. The management accountant should also ensure that measures implemented are inconsistent with the chosen management techniques, such as VBM or ABM. With the growth in popularity and maturity of enterprise risk management (ERM) and performance measurement, companies are starting to integrate the two disciplines to better manage risk, while improving their overall performance measurement systems. For example, companies are using risk-adjusted rolling forecasts and integrating their risk and performance measurement processes.