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03/21/2012

MEASURING PERFORMANCE


MEASURING PERFORMANCE

A.   i) How the company could make a loss in 2009 yet improve its cash position

Currently the firm’s loss before taxes in 2009 was AED 684,000. It is lower than the firm’s revenue in 2009 which is AED 4,750,000. As of the first quarter of 2010, the company has AED 316,000 profit. This is much better than 2009 where the firm experienced a loss of AED 684,000.   From 2008 to 2010 it is only 2009 wherein they experienced a loss before taxes. Losses are known as something not good but there are instances that it creates benefits. The company could make a loss in 2009 yet improve its cash position via maintaining a lower level of losses. The company should try to continue minimize its AED 684,000 losses by making sure that all its decisions have been properly planned.  All decisions should be properly tested for its effect to the organization and its finances. The company can minimize losses by making use of travel packages to attract the business clients. With more clients’ means higher income for the firm, this will cover all the losses that were acquired by the firm. If the quantity of money is rapidly increasing, it pays to hold other assets, such as inventories of various commodities, rather than money itself. In such circumstances, these other assets are a better source of meeting future needs for cash than the holding of money, because they can easily be sold for more money than they cost. This principle applies not only to businessmen holding inventories of commodities that they produce, but also to consumers (Cane 1996).

 As inflation accelerates, it pays even the ordinary consumer to hold commodities as a source of future cash rather than cash itself above all, gold and silver or less rapidly inflating foreign moneys. Conversely, if the quantity of money decreases rather than increases, not only does the holding of commodities represent a financial loss while the purchasing power of money in contrast rises, but people also want to hold money even in place of such things as short-term securities and savings and time deposits. This is because in such circumstances namely, a deflation and depression people cannot be sure of converting these near moneys into actual money, since the issuer of the securities or the bank where one has the deposit may go bankrupt first. These are major reasons why periods of deflation are periods of an intensified desire to hold money, and, therefore, of a drop in the velocity of money (Reisman1990).In the face of a declining quantity of money, velocity fell still further, as it became urgently necessary for business firms to raise cash to be sure of being able to pay their debts and as the expectation grew that investments made in the present could not only be made cheaper in the future, once wage rates and other costs fell, but, if made in the present, would incur an actual financial loss. Financial loss flowing from interference with or invasion of economic interests may consist in reduction of existing assets, for example, loss resulting from damage to physical property or from the making of payments to another. The welfare implications of increased default in the corporate sector depend on a number of factors (Scott 2005).

An a priori view is that higher rates of corporate default owing to leverage are undesirable, given the costs and externalities. This is strengthened if default arises from the cyclical context rather than poor management. However, the following qualifications can be made. First, bankruptcies of a certain number of small firms in the context of rapid formation of new businesses may be a sign of a healthy growing economy. Second, loss of firms due to insolvency may be less damaging than unnecessary losses of productive firms due to illiquidity, though the distinction is difficult to make in the aggregate data. Third, costs of reorganization of assets in case of default will depend on the precise provisions of bankruptcy law. Fourth, to the extent that costly default results from excessive levels of leverage, this must be offset against any benefits that such levels may cause, such as in increasing flexibility to finance investment; or in reducing agency costs between managers and security holders, with greater ensuing efficiency to the extent that this is proven; or at the level of the firm taking advantage of tax concessions (Davis 1995).It is important to assess whether risks are known and correctly priced, in which case default is an unlucky but calculated event though externalities may still justify intervention. Liquidity constraints imply that welfare losses are incurred by constrained consumers, even though consumption can be made up later in the life cycle, owing to forced inter temporal rearrangement of consumption; hence the release of liquidity constraints offers welfare gains (Sowell 2000). Maintenance of capital adequacy of financial intermediaries is as vital to protect against losses on personal debt as on corporate debt. But even if capital adequacy is maintained, it is arguable that defaults would be fewer if financial intermediaries were more restrained in their pursuit of market share especially since such episodes often culminate in an over tightening of credit standards in reaction. Even if lenders adequately cover their risks during such episodes, the risk to households and the macro economy could justify restraint. Such restraint could be encouraged by more detailed prudential oversight of risk premiums and changes in equilibrium quantity rationing such as loan to value ratios, or limitations on tax write offs against specific provisions (Dubofsky & Miller Jr 2003).

ii) How the budgeted statements reflect the board decisions

The board’s three decisions contributed to the success of the financial status of the firm. The three decisions are helping the firm recover from the low revenue of 2009. The firm’s revenue in 2008 is AED 5,600,000, in 2009 it went down to AED 4,750,000. As of the first quarter of 2010 the revenue has reached AED 3,456,000. The gross profit tells the same story. In 2008 the gross profit reaches AED 3,941,000. In 2009 it went down to AED 3,041,000. As of the first quarter of 2010 the revenue reaches AED 2,171,000. If the firm can maintain such rates, it may achieve bigger finances as the year ends. Since the firm has a good financial standing then it has an easier chance to create a budgeted statement that it can use for the succeeding year. Having a good financial statement makes budgeting decision easier since the firm would not worry about maintaining the finances and lowering the liabilities or losses. The fact is that key executives interpret financial statements very differently when using them as a vital ingredient in the process of decision making and control. And in recent years there has been distinct and widespread dissatisfaction with the quality of the financial statements provided. Nowadays, the users of financial statements are making demands that preparers of financial statements feel themselves incapable of meeting. Financial statements are regarded as an information system. They are intended to provide information (Kirkegaard 1997).

 But in order to provide information one needs to have access to the information required. And in order to obtain this information one needs to carry out measurements. Financial statements for given periods consist of a great number of different items. Traditionally, these items are divided into different types according to what is known as a chart of accounts, which simply means a list in which each account is named, described and organized in a specific order. The chart of accounts controls the systematic order used. Items that are logically connected in terms of type are placed in the same section of the system, itemized in the same account. This enables us to add up the expressions contained in the accounts by aggregating the data provided. These aggregations consist of sums and balances, and in principle they can be calculated at any time to cover periods of varying length (Comiskey & Mulford 2000).The process of drawing up a financial statement starts by making a copy of all the sums and balances entered in accounts organized according to the principles of double entry bookkeeping. This copy is known as a trial balance. The trial balance is drawn up at the end of a period, which means that it should include all the items from the first day of the period up to and including the last day. The trial balance cannot be drawn up until after the end of the period concerned. Trial balances can be drawn up the day after a certain accounting period ends (Bragg 2001). Naturally, some suppliers send invoices more slowly than others for services rendered. So in practice a certain delay is always required, a delay that is irritating but necessary to ensure that the trial balance really does contain all relevant items. The delay is generally spent in calculating what are known as accruals, a name given to items regarded as describing the value of an enterprise's stock, its work in progress, and what are known as its fixed assets. Items regarded as having a value are entered under assets in the balance sheet. Otherwise, items are written down, depreciated or itemized as a loss made during the period concerned (Seetharaman, Srinidhi & Swanson 2003).

 

B.   i) How the balanced scorecard approach will affect the measurement and management of performance?

A management control system for measuring performance that does not rely solely on financial data, developed by R.S. Kaplan and D.P. Norton. Kaplan and Norton recognized that managers often have a problem assessing staff on factors that, whilst critical to financial returns, are not directly reflected in financial transactions. The four key factors that have a bearing and which are incorporated into the balanced scorecard are: first, the customer perspective or how customers see the company; second, the internal perspective that is the company's own core competencies and excellences; third, the innovation and learning perspective which is the company's capacity to develop and progress in the future; and fourth, the financial perspective or how other stakeholders, notably shareholders, view the company (Rabbino & Ritchie-Dunham 2001). Scorecards seek to redress the use of excessive quantities of transactional information for measuring performance that often build up when no alternatives are available. They are also held to be valuable because they enable the company to develop a long-term strategic view of itself: financial information alone tends to lead to reactive responses dictated by the vicissitudes of the markets rather than to proactive planning that focuses on strategy and vision (Birchard & Epstein 2000).

The trick is to bring financial and non-financial information together and present it in ways that allow profit figures and customer satisfaction ratings, or product quality and share price fluctuations, to be meaningfully compared. Scorecards are also a useful tool for determining the value of a company since value is increasingly associated with non-financial indicators too (Vernon 2002). The Balanced Scorecard is a measurement framework and concentrates attention on the four primary perspectives of corporate performance. Each perspective focuses on a particular question fundamental to the future prosperity of the overall business. The Balanced Scorecard therefore drives performance throughout the organization. There is a direct line of integration between the Vision of the organization and the Strategy that is being pursued. It also provides the top level scoring mechanism to ensure each aspect of the business is on-track (Elkin 1998). The balanced scorecard imposes only the two requirements on measures, parsimony and predictive ability: in principle, scorecard measures are more parsimonious than the potpourri of measures tracked by most large firms, and non-financial scorecard measures predict financial results. The scorecard does not address pervasiveness other than acknowledging that scorecards and scorecard measures are likely to vary across different parts of the organization. Nor does the scorecard address the stability of measures. The running down of performance measures forces changes in some measures and leaves the remainder largely uncorrelated with the new measures, creating some ambiguity as to how performance should be measured (Meyer 2002). BSC is a performance measurement system focused on results. It is flexible and possible to apply differently in different organizations. In general, there are no directives on which performance is to be measured (Kanji 2002).

The balanced scorecard promotes the establishment of tangible objectives and measures that relate to an organization’s mission, vision, and strategy. The balanced scorecard emphasizes strategic process over routine processes. Priorities are set within the major categories, first at the corporate level and then at division, department, team, and even individual levels. The balanced scorecard is a performance-measurement system that combines traditional financial metrics with three additional types of operational measures that drive future financial performance, customer satisfaction, internal processes and innovation and learning activities. For each of the perspectives tracked within the scorecard approach, the user develops a set of goals needed to assess goal achievement. The outcome measures and performance drivers in the four perspectives should incorporate only these activities (Blenkhorn & Fleisher 2001). The balanced scorecard was introduced to measure whether the activities of the company is meeting its objectives A company that implements the balance scorecard gains the ability to translate the company’s vision into operating goals, the balance scorecard communicate the vision and then link it to individual and organizational performance.  The use of the balance scorecard leads to a much strategized business planning process. The balanced scorecard helps a company to know how to gain feedback and learn from such feedback.  This in turn will help the company adjust its strategy according to the feedback and what they have learned from it. The balanced scorecard helps an organization to create reachable objectives. This performance measurement tool focuses more on the strategic process. The balanced score card makes sure that a firm knows about strategies that will make the firm lose its quality. Through the balanced scorecard, operations can be improved through having fewer problems on personnel issues. BSC guides the company in making the best decisions with regards to internal and external activities. Balanced scorecard guides the company in making the best decisions with regards to internal and external activities. Once the best decisions are made the company is directed into a better path of achieving the company’s goal.

ii) Key measures for KRA air from each of the four quadrants of the balanced scorecard

The balanced scorecard is intended to help ensure that all the critical performance measures are evaluated. It provides a check and balance so that one area is not overemphasized at the expense of another. The use of the balance scorecard can be effectively applied to any training initiative or performance solution by training professionals (Bounfour 2003).Performance measurements tied to the customer perspective might be percentage of repeat customers, percentage of complaints, number of new accounts, and so on. Training personnel can also combine the balanced scorecard with a performance-measurement index tool (Sims 1998).For the financial quadrant, KRA air should make sure that its income and loss would always be balanced to maintain the liquidity and profitability of the firm. For the financial quadrant, KRA can make sure that the finances would be well budgeted so that it will reach its proper destination in the firm. For the customer quadrant, KRA air should make sure that the service will be of high quality. For the customer quadrant, KRA air can make use of online communication to get request and complains of the clients. For the internal processes quadrant, KRA air should introduce means of daily communication and rendezvous with the staff and the management. For the internal processes quadrant, regular checkups and maintenance should be done to make sure that the processes would provide excellent services. For the organizational learning quadrant, KRA air should make full use of the internet and information technology to gather necessary data that would be used for organizational learning. For the organizational learning quadrant, KRA air should make sure that the internet would be maximized to help the staff gain learning and information.

References

Birchard, B & Epstein, MJ 2000, Counting what counts: Turning

corporate accountability to competitive advantage, Perseus

Books, Cambridge, MA.

Blenkhorn, DL & Fleisher, CS (eds.) 2003, Controversies in

competitive intelligence: the enduring issues, Praeger,

Westport, CT.

Bounfour, A 2003, The management of intangibles: The

organization’s most valuable assets, Routledge, London.

Bragg, SM 2001, Just-in-time accounting: How to decrease costs

and increase efficiency, John Wiley & Sons, New York.

Cane, P 1996, Tort law and economic interests, Clarendon Press,

Oxford.

Comiskey, EE & Mulford, CW 2000, Guide to financial reporting

and analysis, John Wiley & Sons.

Davis. E 1995, Debt, financial fragility and systemic risk,

Clarendon Press, Oxford.

Dubofsky, DA & Miller Jr, T 2003, Derivatives: Valuation and

risk management, Oxford University Press, New York.

Elkin, P 1998, Mastering business planning and strategy: The

power of strategic thinking, Thorogood, London.

Kanji, GK 2002, Measuring business excellence, Routledge,

London. 

Kirkegaard, H 1997, Improving accounting reliability: Solvency,

insolvency, and future cash flows, Quorum Books, Westport, CT.

Meyer, MW 2002, Rethinking performance measurement: Beyond the

balanced scorecard, Cambridge University Press, Cambridge,

England.

Rabbino, HT & Ritchie-Dunham, JL 2001, Managing from clarity:

Identifying, aligning, and leveraging strategic resources, John

Wiley & Sons, New York.

Reisman, G 1990, Capitalism: A treatise on economics, Jameson

Books, Ottawa, IL

Scott, HS (eds.) 2005, Capital adequacy beyond basel: Banking,

securities, and insurance, Oxford University Press, New York.

Seetharaman, A, Srinidhi, B & Swanson, Z 2003, The capital

structure paradigm: Evolution of debt/equity choices, Praeger,

Westport, CT.

Sims, RR 1998, Reinventing training and development, Quorum

Books, Westport, CT.

Sowell, T 2000, Basic economics: A citizen's guide to the

economy, Basic Books, New York.

Vernon, M 2002, Business: The key concepts, Routledge, New York. 

Appendix

Statement of cash flows for the period 01/01/2009 to 01/01/2010

Cash flow from operations                               AED 2,898, 000

Cash flow from investing                                            (298,000)

Cash flow from financing                                            (347,000)   

Net cash flow                                                            2,253, 000

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