Strategic Management Accounting

Module 5
Performance management
 Whatever it takes to ‘meet the target’

http://www.theage.com.au/victoria/trains-skip-stations-to-evade-fines-20120524-1z7yi.html#ixzz1vnNYVcuy
 Are you successful?

How would you measure success?

How successful are you?

How satisfied are you?

How do you even determine your level of satisfaction?

Why measure?
 Overview of Module 5

Roles of PM

Strategy,
control and PM

Module 5 PM Models

Effective
measures

Improving
outcomes
 Module 5 – how does it work?

Why do we do it?
 Module 5 – how does it work?

Why do we do it?

Are there better ways of doing it?

 Module 5 – how does it work?

Why do we do it?

Are there better ways of doing it?

Practical steps
 Learning Objectives – SMA Module 5
• Explain the importance of performance management
1a
• Explain the role of a performance measurement system in value creation, sustainability
1b performance, and strategic implementation

• Analyse how a properly designed balanced scorecard can implement and monitor strategy
2

• Identify effective performance measures in a given scenario

3

• Assess the root causes of performance issues in a given situation

4

• Evaluate behavioural effects resulting from performance evaluation & reward systems
5

• Describe behavioural effects of measuring performance and rewarding people

7
 Strategic Management Accounting
Module 5
Part A: The role of performance management
 Big W becoming a basket case

http://www.smh.com.au/business/retail/big-w-becoming-a-basket-case-in-the-shopping-ailses-20170222-guiihw.html

Review this article and answer these questions:

1. How much money did Big W lose in the first half the 2017 Financial Year?
2. What is the carrying value of Big W? (and what might affect this amount in the future?)
3. What are the potential causes of Big W’s problems?
4. How did other competitors perform?
5. Woolworths, who owns Big W, was able to beat Coles on the ‘much-watched’ measure of
sales growth. But, what were the problems associated with this win?
6. How would you measure successful performance of Big W?
 Indicator? Measure?

Indicator Measure
 Leading indicators?

The key indicator that Frieda says "bears close watching" is what he calls
China's "credit pulse". It's the change in the growth rate of aggregate credit
relative to the country's GDP. And this credit pulse is "moving sharply in
reverse".
It's about slowing in the rate of growth. And it bears close watching because it tends to:
• lead China's manufacturing PMI (purchasing manager’s index) by about a year; and
• The American equivalent, the ISM manufacturing index, by 14 months.
• Institute of Supply Management (ISM) surveys 300 manufacturing firms on activity)
http://www.afr.com/personal-finance/chinese-credit-the-driver-of-global-reflation-is-now-moving-sharply-in-reverse-20170505-gvz53s
Qantas Scorecard
 Terminology…(start indexing)

Term Page Definition & Example

Performance monitoring ? Watching: Surveillance over performance
Performance management ? Action: Deliberate responses to deal with information to change things
Performance improvement ? Comparison: Absolute or relative target to be achieved
Performance reporting ? Publication: providing useful information on performance (inside & outside)
 Financial performance measurement

Quick scanning identifies questions

Ratios help capture trends and allow for comparisons

Key areas to evaluate:

Performance
Short-term Liquidity
Efficiency
Long-term Stability
 Financial benchmarks
ROE (return on equity) Should be higher than ROA. High is good, but too high indicates an
unhealthy level of debt.
ROA (return on assets) At a minimum - greater than the return you can get for putting your
money in the bank in a term deposit.
Net Profit margin Depends on the organisation – Use industry & previous year
comparisons
Current Ratio Healthy is 2:1 Unhealthy is usually < 1:1
Quick Asset Ratio Healthy is 1.5:1 Unhealthy is < 1:1
Debt to Assets > 60% Indicates a worrying level of debt
Inventory Depends on the organisation – Use industry & previous year
comparisons
Receivables 30 – 60 days is healthy, but > 90 days is very poor
Earnings yield Bank deposit rate combined with a risk premium
Price Earnings (P/E) Australian Shares are usually about 12 – 15
 Comparing SMA and Financial Accounting

Source: © CPA Australia page 392 SMA Study Guide.

Non-financial Performance measurement
Financial Lag

Non-financial Lead SMART criteria

Measures/indicators
WattleJet Case Study
Balanced
Integrating financial data with
scorecard
operating data (ASK/RPK)
Broader measures including
OHS, environment, customers,
employees and the community
Financial Customers

Innovation
Business
and
process
learning
Measurability – some areas are tougher than others
http://www.jacdec.de/airline-safety-ranking-2018/ Example 5.2
Safety Index
 Victoria Police (Example 5.3)

5 key areas of focus

Police service delivery
Improving community safety
Working with stakeholders
Achieving through people
Developing our business

18 KPIs for Police service delivery

Quantity: number of responses to events, prevention checks
Quality: satisfaction measures, proportion of compliance
Timeliness: Percentage of crimes solved within a particular time
Cost: Total output cost
Target’s $21 million profit fudge smacks of desperation

http://www.smh.com.au/business/retail/targets-21-million-profit-fudge-smacks-of-desperation-20160411-go3pww.html

Question 1: Examine how this ‘profit fudge’ took place

Question 2: What caused it to occur?
Question 3: How could it have been avoided?
 Why do we report performance?

Value Accountability Signalling

 GRI
7 general standard disclosures in G4

Strategy and analysis

Organisation profile

Material aspects and boundaries

Stakeholder engagement

Report profile

Governance

Ethics and integrity

G4 Sector Disclosures – Airport Operators
 GRI
7 general standard disclosures in G4 3 specific standard disclosures
Strategy and analysis
Economic
Organisation profile

Material aspects and boundaries Environmental

Stakeholder engagement
Social
Report profile
a) Labour practices
Governance b) Human rights
c) Society
Ethics and integrity d) Product responsibility
 GRI G4 – Sector Disclosures: Airport Operators Sector

GRI: G4 Sector Disclosures – Airport Operators Sector

https://www.globalreporting.org/resourcelibrary/GRI-G4-Airport-Operators-Sector-Disclosures.pdf
 GRI G4 – Sector Disclosures: Airport Operators Sector

Economic

Environmental

Social
a) Labour practices
b) Human rights
c) Society
GRI: G4 Sector Disclosures – Airport Operators Sector d) Product responsibility
https://www.globalreporting.org/resourcelibrary/GRI-G4-Airport-Operators-Sector-Disclosures.pdf
Building quality in

Sustainability Integrated Entity’s

reporting reporting annual report
 Quiz – <IR>
Which of the following is not one of the 6 capitals of <IR>?

Financial

Intellectual

Human

Environmental

Social and relationship

 The 6 capitals

Air, water and land

Financial • Human

Manufactured
• Social and relationship
Intellectual
• Natural
 Governance, risk management & performance

ASIC and The Financial Reporting Council (FRC)

Balancing conformance and performance

Ensuring sound risk management:

Establishing goals and context for risk management
Identifying risks
Analysing risks (likelihood and consequences)
Evaluating and ranking risks
Treating the risks (elimination, mitigate, transfer, self-insure)
ASX CGC Principles & Recommendations

29 detailed
8 broad principles
recommendations

If not, why not!!!

(comply or explain)
 ASX CGC Principles & Recommendations
Solid foundations for management and oversight

Put together an appropriate board so that it adds value

Act ethically and responsibly

Maintain integrity in financial reporting

Make timely and balanced disclosure of results

Respect the rights of owners of shares

Recognise and manage risk

Pay people fairly and responsibly

Elements of the management control system
 Quiz – APES 110

Which of the following is not a fundamental principle of the APES 110

Code of Ethics?

Independence

Integrity

Objectivity

Confidentiality

Professional competence & due care

Professional behaviour
 Quiz - Threats

Which of the following is not a threat to the fundamental principles?

Incompetence

Familiarity

Advocacy

Intimidation

Self-review
Threats to the fundamental principles

Self-interest

Intimidation Self- review

Threats

Familiarity Advocacy
 What is agency?

Ownership
& Control
 What is agency?

Shareholders Directors

Ownership Control

Principals Agents
Agency theory

We ask the agent to act

on our behalf:

• Politicians
• Managers
• Accountants
 But…
Agents are self-interested
(ethical egoism)
• Conflict of interest

Agents have more power

• Information
• Control of assets and resources
 Outcomes of agency

Residual loss
• Excessive remuneration
• Risk aversion
Contingency…it depends

No universal best way to

measure performance