Performance Measurement
Financial measures
Profitability (gross margin, net margin, ROCE), liquidity (current and quick ratios), activity (receivables days, inventory days, payables days, asset turnover), gearing and investor ratios (EPS, dividend cover). A single ratio is meaningless: comparisons are needed across time, against budget or against competitors, and accounting policies and year-end balances can distort them.
Divisional performance
- ROI = controllable profit ÷ controllable investment
- Residual income (RI) = profit − (imputed interest rate × investment)
ROI is a percentage and comparable across sizes, but it can cause a manager to reject a project earning above the cost of capital but below the division's current ROI. RI avoids that problem but is an absolute amount, so larger divisions always score higher.
Non-financial measures
Quality (rejects, complaints, warranty claims), customer satisfaction, employee measures (turnover, absenteeism, days lost), innovation (percentage of sales from new products) and environmental/sustainability measures. Non-financial does not mean non-quantifiable: most are measured numerically.
Frameworks
A balanced scorecard groups measures into financial, customer, internal process, and learning and growth perspectives, each with objectives, measures, targets and initiatives. For not-for-profit organisations use value for money: economy (cheapest inputs), efficiency (inputs per unit of output) and effectiveness (outputs achieved against objectives).
Worked rule
A division earns £180,000 on assets of £1,000,000 → ROI 18%. A project earning £30,000 on £200,000 (15%) would reduce ROI to £210,000 ÷ £1,200,000 = 17.5%, yet RI at a 12% cost of capital rises from £60,000 to £66,000.