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Every department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company's suppliers and customers. Unfortunately, managers may not be aware of the multitude of measurements that can be used to track these different levels of performance or of the ways that these measurements can yield incorrect or misleading information.
This book is designed to help managers select the best possible set of measurements for a given situation. Chapters 2 through 13 itemize a series of performance measurements for different aspects of a company. Chapter 2 contains asset utilization measurements that can be used to determine a company's ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.
Chapter 3 contains operating performance measurements, which describe an organization's operating performance in such areas as sales, gross margins, investment income, operatingprofit, and net profit.
Chapter 4 contains cash flow measurements, which are useful in determining the ability of a company's cash flows to keep it in business. These measurements should be used in conjunction with the liquidity measurements in Chapter 5, which focus on additional measurements related to cash flows, such as a company's ability to collect accounts receivable in an efficient manner, use its inventory within a short time frame, pay its accounts payable when due, and generally maintain a sufficient amount of liquid funds to pay off short-term liabilities. Chapter 6 contains capital structure and solvency measurements, which determine the relationship between a company's debt and equity, as well as the comparative proportions of different types of stock. It also addresses a company's ability to remain solvent and so can be used in conjunction with Chapters 4 and 5.
Chapter 7 contains return on investment measurements, which encompass net worth, several types of return on assets and equity, earnings per share, economic value added, and return on dividends. Chapter 8 addresses a company's financial market performance by describing such measurements as the price/earnings ratio, several variations on the stock options to common shares ratio, market value added, and the cost of capital.
Chapters 9 through 13 cover measurements for individual departments. These chapters are devoted to performance measurements for the accounting, engineering, logistics, production, and sales departments. In contrast to Chapters 2 through 8, which are devoted to measurements that are primarily used by the accounting and finance functions, Chapters 9 through 12 are more concerned with such issues as work capacity levels, efficiency, and effectiveness, which in many cases require no financial information at all. For example, measurements in Chapter 11, which deals with logistics, cover such topics as production schedule accuracy, the on-time parts delivery percentage, and picking accuracy for assembled products.
Chapter 14 covers a variety of topics related to measurements using the Microsoft Excel electronic spreadsheet, including how to set up comprehensive sets of measurements that can be used for proportional, leverage, ratio, and trend analyses. It also covers a variety of spreadsheet formulas and report formats for forecasting, cash flow analysis, capital asset purchase analysis, interest compounding, investment analysis, and risk analysis.
The book concludes with an appendix and glossary. The Appendix lists the names and formulations of every measure in the book, sorted by chapter. This list should only be used with the precautions given for them in their respective chapters to ensure their proper use. The Glossary covers the definitions of the terms found in many of the measurements listed in this book, to clarify the exact types of information needed.
The chapters containing measurements (Chapters 2 through 13) have an identical structure. Each begins with a table that lists the measurements described in it, which one can use to quickly access a needed calculation. Thereafter, each chapter is broken down into the discussion of individual measurements. Within each measurement section there are a description, formula, example, and discussion of cautionary items. The description typically notes how the measurement is used and who uses it. The formula shows any variations on the calculation and what types of data to include or exclude from it. The example is generally a complete scenario that describes how the measurement is used in a simulated business situation. Finally, any cautionary items are noted; these can include the ways in which the measurement can be altered to yield incorrect results, or what other measurement should be used with it in order to yield a more comprehensive set of information.
The reader may use this book to search for a single calculation, which can be used for highly targeted needs. However, a better approach is to peruse the entire book, with the objective of developing a complete set of measurements that will yield a more comprehensive view of a company's entire operating and financial situation. For example, a CFO might be interested in a company's stock market performance and therefore watches only the price/earnings ratio. However, this single measurement focuses only on the perception of investors with regard to a company's future earnings potential. A more rounded set of measurements might include the days of sales backlog (since it indicates future changes in sales volume), production capacity utilization (since it shows the ability of the company to produce its incoming sales), and the days of accounts receivable (since it shows the company's ability to convert sales into cash). The exact set of measurements will change in accordance with a company's industry, size, operational configuration, and degree of financial leverage, but one issue will remain the same: A single measurement is not enough to yield a clear view of a company's financial and operating condition.
Even if a company has developed a reasonable set of measurements, this does not mean that they should never be changed. On the contrary, measured items will generally gather a great deal of management attention and then improve to the point where they no longer change-thereby resulting in a stale set of measurements. For example, inventory accuracy can improve only to 100%. At this point, the measurement is needed on a monitoring basis to ensure that it does not degrade, while a new measurement can be created to be the focus of corporate attention. However, there will be a few measurements, usually involving sales levels and break-even points, that will always be the centerpiece of any measurement system, since they bring attention to bear on the most crucial revenue and cost elements of the business. Thus, a properly designed measurement system should include a few key items that will be constant for many years, accompanied by other measures that are used for internal improvement purposes and will change in concert with corporate objectives.
This book is filled with nearly 200 financial and operational measurements that have proven to be of considerable use to the author in tracking the performance of many companies in a variety of industries. If you would like to see other measurements in the next edition of this book, please send your request to the author at firstname.lastname@example.org.
Excerpted from Business Ratios and Formulas by Steven M. Bragg Excerpted by permission.
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|About the Author|
|2||Asset Utilization Measurements||5|
|3||Operating Performance Measurements||35|
|4||Cash Flow Measurements||49|
|6||Capital Structure and Solvency Measurements||103|
|7||Return on Investment Measurements||119|
|8||Market Performance Measurements||139|
|9||Measurements for the Accounting/Finance Department||151|
|10||Measurements for the Engineering Department||179|
|11||Measurements for the Logistics Department||195|
|12||Measurements for the Production Department||227|
|13||Measurements for the Sales and Marketing Department||255|
|14||Measurement Analysis with an Electronic Spreadsheet||273|
|Appendix: Measurement Summary||303|
Posted May 16, 2012
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