Performance measurement and performance management look similar but there is a big difference. In short, performance measurement is just part of performance management and they are both an ongoing process. Performance management covers everything, managing the performance from day 1 to the end of the organisation.
In managing the performance, we are aiming to improve the performance of the organisation, process and the employees. Cost information provides us one of the main information to understand the efficiency of process (for example). Cost and management accounting techniques are used as the information provided will be useful for measuring the performance of process. Furthermore, employees' performance can also be measured through this information, for example whether purchasing manager is able to purchase at a good price.
Decision making is directly linked to performance. A good decision will result in good outcome, leading to good performance. Therefore, decision making is part of the syllabus of performance management.
There will also be plans to achieve the company's objectives so budgets will be set. If the actual performance is meeting the budget requirement, it can be said that the performance is good. To manage performance, there should be a plan to achieve (budget) and actively ensure that company is achieving the plan.
After the planning and decision making work, the performance information (such as cost variances) are collected so that control can be taken place. Performance measurement is a control procedure and this aims to measure the actual performance and determine whether it is good or bad so that new actions or changes in existing actions can be planned (which means that the procedure will start again from budgeting).
Performance management covers all the above. In short, we can say that performance management involves planning, control and decision making so that the performance will improve continuously.
Monday, January 16, 2012
Friday, January 13, 2012
Investment appraisal terms
For the first time you approach investment appraisal topic, you might find that the terms used are technical. This article clarifies the meaning of certain basic terms. A number of sentences will be used as examples.
1. Payback method can be used for initial screening of the projects.
As we normally identify a number of projects, calculating the payback periods (the time of breakeven) for each project help in determining which project covers the investment cost in the shortest time. As payback period is simple to calculate, it is normally used at the initial stage to scan through all projects.
2. Discounted cash flows take into account time value of money.
Discounted cash flows mean that the future cash flows are converted to the value now (present value). As the value of money drops each year, discounting the cash flows will take into account the effect of time value of money.
3. We can discount the cash flows at company's cost of capital.
Cost of capital is expressed in percentage. The cost of the company's capital is actually the need of repaying the investors, ie. required rate of return of the investors. So for example, if the cost of capital is 10%, we can refer to the present value table to identify the rate of discount at 10%. Time period of cash flows will be taken into account.
4. Positive net present value (NPV) project generates wealth for shareholders.
NPV is the present value of cash flows less investment cost. As NPV also takes into account time value of money, positive NPV represents the value added to the shareholders and also the value of the company.
5. If internal rate of return (IRR) is greater than cost of capital, project is acceptable.
IRR is the rate where net present value (NPV) is zero. This means that if the IRR rate is used for discounting, NPV will be zero. IRR should be greater than cost of capital so that the margin of safety to meet the required rate of return by investors is large enough. If IRR is less than cost of capital, that means the project reduces the wealth of shareholders as discounting at higher rate (cost of capital) will result in negative NPV.
The above may be some of the new things faced in investment appraisal topic. You need to focus on understanding them as they are useful for future papers. It is okay if you can't understand everything here because you will get a more detailed explanation in class. :)
1. Payback method can be used for initial screening of the projects.
As we normally identify a number of projects, calculating the payback periods (the time of breakeven) for each project help in determining which project covers the investment cost in the shortest time. As payback period is simple to calculate, it is normally used at the initial stage to scan through all projects.
2. Discounted cash flows take into account time value of money.
Discounted cash flows mean that the future cash flows are converted to the value now (present value). As the value of money drops each year, discounting the cash flows will take into account the effect of time value of money.
3. We can discount the cash flows at company's cost of capital.
Cost of capital is expressed in percentage. The cost of the company's capital is actually the need of repaying the investors, ie. required rate of return of the investors. So for example, if the cost of capital is 10%, we can refer to the present value table to identify the rate of discount at 10%. Time period of cash flows will be taken into account.
4. Positive net present value (NPV) project generates wealth for shareholders.
NPV is the present value of cash flows less investment cost. As NPV also takes into account time value of money, positive NPV represents the value added to the shareholders and also the value of the company.
5. If internal rate of return (IRR) is greater than cost of capital, project is acceptable.
IRR is the rate where net present value (NPV) is zero. This means that if the IRR rate is used for discounting, NPV will be zero. IRR should be greater than cost of capital so that the margin of safety to meet the required rate of return by investors is large enough. If IRR is less than cost of capital, that means the project reduces the wealth of shareholders as discounting at higher rate (cost of capital) will result in negative NPV.
The above may be some of the new things faced in investment appraisal topic. You need to focus on understanding them as they are useful for future papers. It is okay if you can't understand everything here because you will get a more detailed explanation in class. :)
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