Lowering costs such as direct and indirect expenses

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Unformatted text preview: ms. Performance Measurement Systems A Performance Measurement System (PMS) is one that measures performance by comparing results with targeted results. The more modern system is the Strategic PMS (SPMS). SPMSs replaced PMSs because they were inadequate for newer and more complex business structures. SPMSs are a set of linked financial and non ­financial objectives, measures, goals and initiatives designed to align managers’ (and also employees) goals in the same direction. However, we must know that there are limitations in just trusting financial measures. This is because they only provide limited guidance as to where the company is headed in that we do not know exactly what we need to do when we have a figure given to us and that it may also cause higher agency costs. The Balanced Scorecard The most popular SPMS is the Balanced Scorecard. It starts from an entity’s vision and mission statements and uses them to develop objectives in four key perspectives: • • • • Financial Customer Internal Business Processes Learning and Growth In all these key areas, each objective has a measure, target and initiative associated with them. This is usually the last step in building the Balanced Scorecard. The previous steps are: 1) Conduct an internal and external analysis to formulate a strategy. 2) Decide on a strategy. 3) Build a strategy map that links all four perspectives. Financial Perspective In the Financial Perspective we answer the question, “How should we appear to our shareholders?” or “How is success measured by our shareholders?” This question can be answered through revenue growth and productivity. Entities should look at ways to increase both of these. One way to increase revenue growth is to retain customers or selling them additional products/services on top by providing more to the customer. Lowering costs such as direct and indirect expenses can increase productivity. Entities can also use their assets and employees more efficiently to achieve productivity increases. Management Accounting 2 – Semester 2 2010 13 Implementing Strategy Customer Perspective For the Customer Perspective, we ask ourselves, “How should we appear to our customers?” Customers would want to see the entity as one that benefits them. Some examples of how this question can be answered are: • • • • Lowest costs Product value Product innovation Complete customer solutions A mix of product, service, relationship and business image is required. Just taking one of these and applying it will generally not work. Internal Business Process Perspective The entity answers the question, “What business processes must we excel at?” in the Internal Business Process Perspective. We consider all our business processes such as: • • • • Operations Innovation Customer Services Regulatory and Social Learning and Growth Perspective “How will we change and grow?” That is the question under the Learning and Growth Perspective. This is where we look at improving at what the entity already does. A business is never perfect, it needs to always leave room for improvement and innovation to best deliver to customers. This can be achieved by learning and growth in human resources, developing and updating IT, organisational structure and culture by aligning employees with the entity’s principals. What makes a good Balanced Scorecard? As the name of the Balanced Scorecard says, a good one should be balanced in that there should be an even amount of both short and long term objectives. There should be linkages between the objectives; no single objective should be left without a linkage with another. There should be around 16 to 28 objectives on the Balanced Scorecard. It should also incorporate both lead and lag indicators. Lead indicators are those that indicate how the future will look like while lag indicators are those that we see after something has happened (ie. A customer complaint is a lag indicator as it happens after we sell something). A Balanced Scorecard should also include indicators that are unique to the company, not generic ones like Net Profit. Management Accounting 2 – Semester 2 2010 14 Implementing Strategy Limitations of a Balanced Scorecard There are a number of limitations to a Balanced Scorecard. First, there is very time consuming and expensive to construct a good balanced scorecard. There is also difficulty in...
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This note was uploaded on 10/13/2013 for the course ACCT 2522 taught by Professor Chang during the One '11 term at University of New South Wales.

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