TECHNIQUES OF CORPORATE

PERFORMANCE MEASUREMENT
(INTRODUCTION & TRADITIONAL FINANCIAL
MEASURES)
SUBMITTED TO: SUBMITTED BY:
MRS. SHEETAL RITIKA NARANG
MCOM 3RD SEM
ROLL NO- 5803
 INTRODUCTION

• Performance management is the process of measuring how an organisation or business is

achieving its desired objectives.
• It is the process of - collecting
- analysing &
- reporting
information regarding the performance of an organisation.
• It helps to provide useful information to the managers to determine the progress of the
organisation.
• Key in ensuring successful implementation of organization’s strategy
 Long term goals → broken to short term targets → this helps to identify critical
success factors & key performance indicators → these are monitored to ensure
that the targets are met.
 Example
CSF KPI
Competitiveness • sales growth by product or service
• relative market share and position
 A company must perform well on various dimensions like - cost, quality, customer
satisfaction etc.
 TECHNIQUES OF BUSINESS
PERFORMANCE MANAGEMENT
FINANCIAL TECHNIQUES
TRADITIONAL TECHNIQUES
• Variance Analysis
• Contribution Margin
• Return On Investment
• Ratio Analysis
• Budgetary Control & Reporting
• Responsibility Accounting
• Transfer Pricing
MODERN TECHNIQUES
• Residual Income
• Economic Value Added
• Balanced Score Card
• Activity Based Costing
• Benchmarking
• Six Sigma
• Performance Prism
NON - FINANCIAL TECHNIQUES

CUSTOMERS
SUPPLIERS
HUMAN RESOURCE & SOCIETY
ENVIRONMENT
OPERATIONS
 FINANCIAL TECHNIQUES

■ Used to monitor the inflows (revenue) and outflows (costs) and the overall
management of money in the business.
■ These measures focus on information available from the Statement of profit or loss
and Statement of financial position of a business.
 1. VARIANCE ANALYSIS

■ Meaning: In general, It is an analytical tool that managers can use to compare the
budgeted and the actual output. It is used to maintain control over a business.
■ Definition:
According to S.P. Gupta “Variance analysis is the measurement of
variances, location of their root causes, measuring their effect and their disposition.”
 VARIANCE
On the basis of

Elements of Cost Control Nature Impact

• Material cost • Controllable • Basic variance • Favourable variance

variance variance • Sub variance • Unfavourable variance
• Labour cost • Uncontrollable
variance variance
• Overhead
variance
IMPORTANCE

• Budget/Actual Costs
• Relationships
• Forecasting
• Planning standards and bench marks
• Control Mechanism
• Responsibility
ADVANTAGES
• Indicate Deviation
• Controlling Expenditure
• Adjust Budget Estimates
• Evaluate performance
• Roles and responsibility
• Accountability

DISADVANTAGES
• Difficult to establish standards
• Ignores other objectives
• Short termism
• Reporting delay
• Difficult to apply in service sector
• Affects the morale of the employees
 2. CONTRIBUTION MARGIN

• Meaning: It is a measures the ability of the company to cover variable costs.

In accounting, It is the difference between the selling price and the variable costs &
the amount left is called contribution, covers fixed cost or is profit.
• Formula:
CONTRIBUTION = SELLING PRICE – VARIABLE COSTS
CONTRIBUTION RATIO = CONTRIBUTION / SALE
 IMPORTANCE
• Determining profitability
• optimize production levels, reduce fixed costs, increase products sold
• Add or remove the products
• Cost reduction

ADVANTAGES DISADVANTAGES

• Easy to use • Short run optimisation

• Available information • Fixed costs constant
• Profitability • Affects long run
decisions
• Decision Making
• Incremental pricing decisions
EXAMPLE:

■ Sales Revenue : 10,000

■ Variable Expenses:
Manufacturing 4,000
Marketing and administrative 1,000
■ Fixed Expenses
Manufacturing 2,000
Marketing & Administrative 500
■ From the above data we can calculate contribution margin and net operating profit as follows:
Contribution Margin = 10000- (4000+1000)= 5000
Net Profit = 5000 –(2000+500)= 2500
 3. RETURN ON INVESTMENT

Meaning : A performance measure used to evaluate the efficiency of an

investment or to compare the efficiency of a number of different
investments.

It is usually expressed as a % and is typically used for personal financial

decisions, to compare company’s profitability.

Computation: It is computed as follows:

ROI = (Net profit / Cost of investment )*100

ADVANTAGES
• Better measure of profitability
• Achieving Goal Congruence
• Comparative analysis
• Performance of investment division
• Indicator of other performance
ingredients
• Matching with accounting
measurements

DISADVANTAGES
• Different concepts
• Similar accounting policies
• Influence the decisions
• Focus on short term reuslts
• Manipulation
 4. RATIO ANALYSIS

• Meaning: Ratio analysis is used to evaluate various aspects of a company’s

operating and financial performance such as its efficiency, liquidity, profitability
and solvency.
• Definition:
According to J. Batty “ The term accounting ratio is used to describe significant
relationships which exist between figures shown in balance sheet and profit and loss
account in a budgetary control system or any other accounting management.”
STEPS IN RATIO ANALYSIS

Decide the objectives of ratio analysis

⎮
Select the appropriate ratios

⎮
Calculation of selected ratios

⎮
Comparison of the ratios with same
business firm
⎮

Interpretation of the ratios

 ADVANTAGES
• Summarization & simplification
• Relationship between facts and figures
• Less wastage
• Prompt decisions
• Effective Management
• Effective Control
• Fix responsibilities

DISADVANTAGES
• Based on financial information
• Ignores Qualitative data
• Window dressing
• Does not consider changes in price level
• Does not tell about the future performance
 5. BUDGETARY CONTROL

• Meaning: It is a process for managers to set financial and performance goals with
budgets, compare the actual results and adjust performance as it is needed.
• Definition
According to Brown and Howard “ Budgetary Control is a system of controlling costs
which includes the preparation of budgets, coordinating the departments and
establishing responsibilities, comparing actual performance with the budgeted and
acting upon the results to achieve the maximum profitability.”
ESSENTIALS OF BUDGETARY CONTROL

• Organization for the budgetary control

• Budget manual
• Budget centre
• Budget officer
• Budget committee
• Budget period
• Determination of key period
 ADVANTAGES
• Economy in working
• Establishes Coordination
• Acts as safety signal
• Good relations with credit agencies
• Fixing responsibility
• Reduction in cost of production

DISADVANTAGES
• Difficulty in preparing the budgets
• Affordability
• Uncertainty
• Not a substitute of management
• Lack of support
 6. RESPONSIBILITY ACCOUNTING

Meaning: Responsibility accounting is a reporting system that complies revenue, cost

and profit information at the level of those individual managers who directly held
responsible for them It is commonly used in an organization that distributes
responsibility down through the corporate hierarchy.

Revenue Expense

Types Of
Responsibility
Centres

Profit Investment
 STEPS FOR RESPONSIBILTY ACCOUNTING

Division of company into departments

Determine objectives of each department

Determine actual performance of each department

Compare actual performance with standards

Calculate variance

Taking corrective measures

 ADVANTAGES
• Assigning the Responsibility
• Improves Performance
• Helpful in cost planning
• Delegation & Control
• Helps in decision making

DISADVANTAGES
• Difficulty in preparing the organization chart
• Conflict with the organizational interest.
• difficult to demarcate responsibility centres
• Personal reactions may get ignored
 7.TRANSFER PRICING
Meaning: It is the setting of the price of goods & services between
controlled or related entities with in an enterprise.
Example: If a subsidiary company sells goods to a parent company , the
cost of those goods paid by the parent to the subsidiary is the transfer
price.

OBJECTIVES
• Goal Congruence
• Performance appraisal
• Divisional Autonomy
• Simple and easy
• Relevant information
ADVANTAGES
• Better Coordination
• Motivation
• Better training
• Equal bargaining power

DISADVANTAGES
• Disagreement
• dysfunctional behavior
• Additional Resources
• bargaining powers of the divisional managers
 CASE STUDY: CADBURY INDIA WINS TRANSFER
PRICING CASE

Royalty payments by Cadbury India to its parent company for use of the name 'Cadbury' and
for technical know-how have been held to be at an arm's length under the transfer pricing
regulations in a recent order of the Mumbai Income-tax Appellate Tribunal (ITAT).

Payments of such nature are coming under increasing scrutiny of transfer pricing officers
(TPOs), resulting in a spate of appeals filed by companies to prove that royalty payments
made to overseas related parties are not excessive (in other words, these are at an arm's
length).
In this case, Cadbury India made royalty payments of Rs. 6.36 crore and 5.66 crore
during fiscal 2001-02, towards trademark and knowhow to its parent -Cadbury
Schweppes Overseas (UK). While payments for technical know-how were pegged at
1.25% on net sales, those for trademark usage were at 1% on net sales. The TPO held
these payments to be excessive and added back Rs 2.50 crore approximately to the
taxable income of Cadbury India. The method of computing arm's length pricing
adopted by the Indian company was also disputed by the transfer pricing authorities.

Cadbury India won in an appeal filed with the Commissioner (Appeals), who not only
dropped the enhancement proceedings but also deleted the additions made to income
by the TPO. However, the tax department went in for appeal at the ITAT level.

The Mumbai ITAT observed that other group companies in other countries were also
making similar royalty payments for technical knowhow to Cadbury UK. Further, the
payment made by Cadbury India had been approved of by the Reserve Bank of India
and Foreign Investment Promotion Board. As regards royalty payment for use of the
trademark, the ITAT observed that Cadbury India was in fact paying a lesser amount as
compared to payments for brand Cadbury made globally by other group companies.

Primarily based on these key grounds the Mumbai ITAT upheld the CIT (Appeals) order
and ruled in favour of Cadbury India.
TO CONCLUDE…
The financial techniques may prove advantageous to an organisation but sole reliance
on these may not be recommended as :
• Are useful only for Short term
• Their focus is mainly internal
• Results can be manipulated
• These are not comprehensive
• Backward looking
Therefore, an organisation must also adopt the non financial techniques for better
decision making and timely achievement of the targets set.
THANK YOU