Non Financial Performance Indicators
Financial measures of performance may mislead the stakeholders because they only tells us about the performance of prior periods but in order to gain a wider perspective of performance the following Non Financial performance Indicators would be appropriate;
The company should evaluate its sales growth by products and services in order to understand its market share and size of customer base. There is a possibility that company has more expertise in the assembling of plumbing parts. The import of final products is a general business and always has threats from new entrants. It is also necessary for a company to find out its market share in large markets and stores. It is mentioned that company sells to large retailers such as Bunnings, Mitre 10, and Placemakers which is a good sign for future business prospects. The NFPI will help the company to understand its strengths and weakness and take measures to exploit opportunities and minimize threats (Crosson, 2014).
This could be an interesting as well as learning indicator to measure performance. This will help management in finding quantitative information about the proportion of new goods in the overall sales. If the percentage of new items is low as compare to its competitors then this is not a positive sign and company might lose its market share. This indicator can also help management understand their technological standing against its competitors.
The will help the company to understand the level of customer satisfaction about the products and services and also give an idea about the relationship and satisfaction of customers with sales staff. This could result in managing customer relationship in a more efficient manner and will also reduce the number of complaints and average time to answer customer queries.
This is an internal measure of performance that ensures accuracy in the operations. It will give an idea about the production, import and sale of units of different product line. It will help the company to calculate variances of labour and machine hours. It would also assist in managing working capital cycle by understanding the market trends about receivables, payables and inventory turnover (Marr, 2012).
Quality of staff experience
It is also an important measure of performance and will give information about the employee turnover rate, no of absents, level of job satisfaction and new recruitments. If a company has a high staff turnover rate then it’s a disadvantage because if skilled employees are leaving then this may adversely affect the quality of service and entire business operations.
Including finance, the Balance score card incorporates other measures while assessing performance of the company. Financial measures are only appropriate for short term profit maximization and may be detrimental to company in the long run because a sole objective of capital accumulation may lack customer satisfaction, quality of service, world class manufacturing, recruitment of skilled labour and productivity. The balance score card measure’s company’s performance from four perspectives, Financial, Customer, Internal Business process and Learning and growth perspectives. The four perspectives help the company to improve their overall operations by removing inefficiencies. It improves employee productivity and satisfaction, eliminates constraints in manufacturing process to reduce cycle time and unit cost without compromising on quality. It enhances customer profitability, increases market share by adding new product portfolios and also by maintaining or adding extra features in existing products and services (Kaplan and Norton, 1996).
Goals Alignment Perspective
Goals alignment perspective could best serve the purpose of Simply Plumbing Ltd. In the recent years, sanitary and plumbing products have witnessed a tremendous growth because of new designs, latest technology, luxury life style and customized setups. The products under European brands of Italy and Spain have been dominating the global sanitary industry for decades. In order to meet rising customer demand and remain prominent and unique in the market the board of directors of Simply Plumbing Ltd should take initiative to form strategic alliances in the form of outsourcing, consortium, franchising and joint ventures. This extended fifth perspective could help the organization in understanding the importance of external relations in business growth and will assist the company in achieving joint goals with participating organizations.
Decentralization allows managers of the SBUs to take initiatives and make decisions on their own keeping in view the ground realities. Divisional autonomy results in a positive employee behavior and organization becomes more flexible to respond changes in a timely manner. Head office will have concerns about the duplication of efforts and more importantly they cannot enjoy extreme level of control over divisions. The divisional managers will give proposals which are easy to attain to meet their targets and become entitled for privileges and other job perks. The targets of the divisional mangers may be in contradiction with the head office. Sometimes it is also difficult to maintain adequate communication system between divisions and head office which may be detrimental to the organization as a whole. When delegating authority to managers of responsibility managers head office measures performance on the basis of budget control reports, variance analysis and financial metrics such as ROCE, RI etc (Scarlett, 2005).
The company has followed traditional budgeting system that never identifies pass inefficiencies and transfers them to subsequent periods. It does not justify the budget allocated for each activity separately. It is usually considered quick and easy to prepare by just taking the inflation and other cost estimations into consideration. The existing budgeting system also based on the principles of bureaucracy or top down approach where managers have no role in setting budget targets. The targets are imposed by the head office and managers are obliged to attain them. This is not a long lasting approach and may force managers to manipulate the data or use low quality inputs to meet targets which would affect overall business operations in a medium to long term. The marketing costs should be allocated to each product line keeping in view the prospects of that line in the market. One of the most alarming sign of existing budgeting system is that it discourages the development of new ideas and cost reduction techniques. Employee participation is really important because they are well aware of the ground realties of the market and can come up with more feasible proposals.
Budget Process Change
I would recommend Susan to discontinue existing system of budget preparation and introduce Zero based budgeting or Activity based budgeting system. Susan should implement a hybrid approach of budgeting having ingredients of activity based budgeting and bottom up approach to budget formulation. The overhead costs constitute a large percentage in sanitary business so it would ensure rationale allocation of resources.ABB considered as an important tool for monitoring and controlling costs because it assumes that all costs are variable in the long run. Activity based budgeting will also facilitate implementation of Total Quality management system because the rising competition and business growth for Simply Plumbing Ltd will force the management to implement TQM to become best of the rest in the industry. In addition to ABB, Susan should convince the Board of Directors to allow employee participation in the budget setting process because it will ensure goal congruence, more practical approach to budgeting, open communication, resolve behavioral problems and selection of realistic targets. (Scarlett, 2005).
Being a management accountant, Susan has a big role to play in the business growth of the organization. While setting new budgeting process, Susan should avoid budget padding and budget slack and keep an eye on subordinate staff that they should not propose any budgets which are in excess of the requirements. Susan should ensure proper allocation of resources and apportionment of funds to different responsibility centers and also ensure transparency in the entire financial matters of the company.
Strategic Management Accounting
Strategic Management Accounting is a branch of management accounting that pays attention on obtaining relevant information about the factors external to the company. The extracted information assists the corporate board in formulating strategies and setting real business targets. The basic role of strategic management accounting is to convert weaknesses into strengths and threats into opportunities by employing techniques which are not easily copied in the short to medium term by the rival firms. The following are few techniques that aid senior management in making corporate decisions.
Planning and controlling
The management accountants can aid strategic managers in planning and controlling business strategies by providing timely information on costs and quality of different inputs. The information should be in the form of budgetary control reports and variance analysis keeping in view the inflation, interest rates and other relevant macroeconomic indicators.
Alternative business strategies
The management accountants have the tendency to change the operational strategy keeping in view the contemporary business development. The strategies could be the implementation of TQM, JIT and Kaizen that emphasis on cost control and saves organization’s money. The strategic information could also be provided for closures, selloffs, acquisitions, product or market development and diversification strategies (Scarlett, 2005).
The management accountants can help strategic managers in deciding which investment options are feasible. They can conduct cost benefit analysis by calculating the return on investment using appropriate discount rates. They can also formulate efficient cash management policies with the help of short term and liquid investment opportunities.
Management accountants can better assist strategic managers in implementing different pricing strategies according to the PLC. These decisions play an effective role in boosting sales which ultimately enable the organization to meet its corporate goals. The pricing strategies could be market skimming, penetration, loss leader, premium depending upon the need of the target market segment (Kotler, 2001)
Management accountants could have supported senior management in their understanding of the following issues that has lead to the reorganizing of the business;
- Formulation of such employee benefits policies that offer benefits to the organizations as well as to the employees.
- Flexible Human Resource Policies or working hours could have saved organizational resources that could be utilized elsewhere
- Efficiency and effectiveness in setting divisional budgets
- Keep strict control on organizational resources and take corrective actions on variance analysis and budgetary control reports
- Minimization or complete elimination of recruitment costs and introduce new method of induction which is cost effective (Perry, 2009).
Crosson, S. (2014). Managerial accounting. South-Western Cengage Learning.
Kaplan, R. and Norton, D. (1996). The balanced scorecard. Boston, Mass.: Harvard Business School Press.
Marr, B. (2012). Key performance indicators. Harlow, England: Pearson Financial Times Pub..
Perry, B. (2009). Enterprise operations. Oxford, UK: CIMA/Elsevier.
Scarlett, R. (2005). Management accounting performance evaluation. Oxford, U.K.: CIMA Publishing/Elsevier.
Kotler, P. (2001). Marketing. Frenchs Forest, N.S.W.: Prentice Hall.