Are we performing to shareholder expectations?
The Financial Management scorecard is a well developed information sweet spot for better performance management in most companies. Three basic performance measures are critical to any business:
- Revenue growth: A key component of shareholder value creation. If costs stay flat, revenue increases will directly affect earnings growth, leading to a positive change in the price to earnings (P/E) ratio.
- Operating margin: Executives and investors watch the operating margin and the associated percentage of operating margin to sales ratio.
- Asset efficiency: More sophisticated performance measures include return on capital employed (ROCE), return on assets (ROA) and economic profit.
A fourth measure reflects new realities in compliance and governance:
- High-level risk exposure: The flip side of this coin is tracking various categories of risks and mitigating factors that may affect your ability to meet your performance goals. These measures line up with the investor's perspective, indicating the risks/rewards generated by a given capital or asset base.
Integrated decision areas can provide the Financial Management information you need for these performance measures.
Revenue growth performance
Revenue Growth decision areas, drawn from across departments, can help you determine:
Is revenue growing? How fast? How does this compare with projections?
How is the business performing against plan? What is driving any revenue variances?
If volume, price, or product mix reasons drive the sales variances, drill down into the appropriate decision areas for further analysis. For example, if premium product sales are declining, you should review product life cycle management.
- Income statement: How did the business team score? Where was performance strong or weak?
- Drill-down variance: What causes changes in financial performance?
- Sales plan variance: What drives the sales plan and performance?
Operating margin performance
Operating Margin decision areas, drawn from across departments, can help you determine:
How does our operating margin compare to our competitors'?
If operating margins are weakening, you need to examine the income statement to determine why.
Other margin indicators such as material margin or gross margin help identify which costs are increasing within cost of goods sold (COGS).
Operational plan variance may suggest that selling, general and administrative (SG&A) costs are significantly higher than plan, and the drill-down variance can help determine the cause.
- Drill-down variance: What causes changes in financial performance?
- Income statement: How did the business team score? Where was performance strong or weak?
- Operational plan variance: How do we best support, coordinate and manage the delivery of meaningful plans?
Asset efficiency performance
Asset Efficiency decision areas, drawn from across departments, can help you determine:
Does our asset efficiency index align with market expectations?
The CapEx and Strategic Investments decision areas may highlight when a major plant or equipment investment program has increased the fixed asset base.
By looking more closely at Cash Flow and Working Capital, are accounts receivable delays negatively affecting working capital?
Looking at the Treasury decision area, are we confident that interest on liquid assets such as cash contribute to asset efficiency performance?
- Income statement: How did the business team score? Where was performance strong or weak?
- Balance sheet: How do we balance and structure the financial funding options, resources and risks of the business?
- Cash flow and working capital: How do we manage working capital, collect accounts receivables and monitor cash use effectively?
- Treasury: How can we efficiently manage cash and liquidity requirements?
- Capital expenditure and strategic investments: What are the investment priorities and why?
Risk exposure index
Risk Exposure decision areas, drawn from across departments, can help you:
Review changes in exposure and evaluate the potential impact on capital allocation across the business.
Drill down for additional insight into inherent risk (such as loss events, loss amounts or risk assessments), and into the methods of responding to risk (such as avoidance, reduction, sharing, and acceptance).
Review Compliance Management to see the effectiveness of internal controls and the status of current compliance programs and audit activity.
- Risk management: Are we managing the risks of sustaining this performance?
- Compliance management: Are we complying with regulatory requirements?
