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The Importance Of Creating A Performance Measure In An Organization

1590 words - 7 pages

Performance measures play an important in all companies and their daily operations. By providing multiple methods of comparison and evaluation, accounting measurements provide a better view of the overall state of a corporation. Not only do investors use certain measures to help decide which companies to invest in, but internal managers use other measures to make sure their company is meeting set standards and that it is not falling behind or losing money. Therefore, it is important that these measures are accurate and not misleading. It is up to auditor and regulators, such as the SEC, to ensure that only reliable measurements are being provided. While, customized measurements can more ...view middle of the document...

Executive and internal managers can use different performance benchmarks to help them improve their operations. Certain benchmarks can help managers set better goals for the next year and help forecast for the next year. There are also measures that can be used to ensure all parts of the business are profitable and if there is one that is not they can determine whether or not to remove the segment that is loosing money. Other measures can be used to ensure all employees are working efficiently and that all products being made meet quality requirements.
There are many different traditional accounting measures that are used today such as, net profits, gross margin, ROA, ROE, and EPS. Net profit (or Income) is a company’s total earnings for a period. It is also referred to as the “bottom line” since it falls on the very bottom of a company’s income statement. To calculate net profit, first, the company starts with total revenue. Then, all the expenses incurred for the period are subtracted out and then the taxes are removed. This will leave the company with their Net profit for the period. Net profit can be used to measure and company’s profitability over a period of time. A company’s gross margin is the percent of total sales revenue that is retained after incurring direct costs related to production (cost of goods sold). This is calculated but taking the total sales revenue subtracting out the cost of goods sold and then dividing that by the total sales revenue. The percentage represents how much the company retains for every dollar of sales revenue. ROA (Return on Assets) measures how profitable a company is relative to it total assets. This indicates how efficiently assets are being used to generate earnings. It is calculated by dividing net income by total assets. ROE (Return on equity) indicates how much profit is generated with the money shareholders have invested. It is calculated by dividing net income by shareholder’s equity. EPS (Earnings per share) is the portion of profits allocated to each share of common stock that is outstanding. Subtracting dividends paid to preferred stock holder from Net income, and then dividing that by average of outstanding shares, calculates EPS. Along with accounting measures, there are also many traditional manufacturing measures. These include, Productivity, Inventory turnover ratio, CM Ratio, process capability ratio, and SPC. Productivity measures the amount of outputs relative to the amount of inputs. The formula for productivity is units produced divided by inputs used. There are many other types of productivity that follow this same concept such as, labor productivity. Inventory turnover ratio is calculated dividing cost of good sold by average inventory. This ratio indicates how many times inventory is sold and replaced over a period of time. The CM ratio (Contribution Margin Ratio) is calculated by the total contribution margin divided by total sales. This shows the percent of sales for each...

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