Use of Balanced Scorecards - Essay Example

Finance and Accounting Introduction to Finance & Accounts M004 (D01) Work 2 (CW2) (Word Count: 0) (Name) Student ID: (Number) Individual End-of-module Report Go Ahead Group Plc March 2013 Table of Contents Content Page Executive Summary………………………………………………………………………………………………………….. 3 Introduction…………………………………………………………………………………………………………………….. 4 Vision Statement….………………………………………………………………………………………………………….. 5 Balanced Scorecard…………………………………………………………………………………………………………. 6 Strategy Map…………………………………………………………………………………………………………………… 9 Recommendations………………………………………………………………………………………………………….. 11 Use of Balanced Scorecards……………………………………………………………………………………………. 13 References…………………………………………………………………………………………………………………….. 15 Executive Summary The report comprises of a detailed analysis of financial performance of Go Ahead Group Plc., a leading concern in the public transportation industry. This is supported through various tools including balanced scorecard, strategy mapping and financial and non-financial key performance indicators. The organization prioritizes its objectives to focus mainly on customer satisfaction, market growth, cost reduction and environmental and social responsibilities. The report further identifies the performance indicators that can be used to measure the performance of the organization in support of how far the company has been successful in achieving its vision and long term corporate strategy. The balanced scorecard shows detailed perspectives of the company namely Financial, Customer, Internal business and Innovation and Learning. When measured against this framework, we were able to develop a strategy map to highlight what strategies shall be necessary to be adopted in order to achieve each of the targets developed in the scorecard. On the basis of this map, recommendations have been made to the board in order of their priorities, which if effectively acted upon shall generate desired outcome and the company shall be closer to achieving its long term vision and goals. In the last part of the report, it has been discussed as to how the balanced scorecard can be efficiently used in practical world to benefit businesses in achieving their objectives and targets and achieving an ideal balance between their priorities and perspectives. To: Board of Directors – Go Ahead Group Plc. From: (Name) – Management Consultant Subject: Balanced Scorecard and Performance Analysis of the organization Dated: (Date) Introduction This report is intended to provide a detailed financial analysis and performance measurement of the organization. This is supported through various tools including balanced scorecard, strategy mapping and financial and non-financial key performance indicators. The report is aimed at analyzing how all the four perspectives of the scorecard with respect to the mentioned entity (Go Ahead Group Plc.) can be balanced in the most appropriate proportions and manner in order to attain its vision and strategy in the long term. As discussed in Course Work 1, Go Ahead Group Plc is one of the leading corporations in the public transport sector. In financial terms, it has captured largest market share of this industry while in non-quantitative terms, it has met every expectation of its clients by ensuring to cover maximum territories with least lags and time delays and by fulfilling all its social and environmental responsibilities to keep the pressure groups and other regulatory bodies satisfied. Also, it has focused largely on customer satisfaction through reduced waiting times and systematic scheduling and planning of transportation routes. If we take a general overview of its ratio analysis conducted previously, we observe that the company is performing with excellent metrics within last 2 years, though current year’s performance has deteriorated as compared to previous year. It is achieving a decent amount of annual revenue with a slight control over its costs, resulting in a profitable situation. The assets are being utilized efficiently to generate profits as expected while the liquidity ratios suggest that the company is prone to facing bankruptcy and solvency issues in near future if the position doesn’t show any improvement in this area. It fulfils expectations of its shareholders and shows above satisfactory dividend yield and earnings available for distribution as compared to industry benchmarks. In qualitative terms, the entity has maintained a punctuality rate of arrivals and departures at 90% of the times. It has been working on its measures to control accidental and crime rates and increase safety precautions for its employees and the passengers. The company has managed to mitigate employees’ injuries and calamities to 1% while bus accidents to 31% in the current year. Furthermore, it has been assuming its environmental responsibilities very seriously, saving 6% energy consumption through the usage of energy saving lights and, additionally, intends to reduce carbon emission from its heavy vehicles used in transportation by 20% in near future. A detailed discussion and analysis of all such performance indicators have been provided in following part of the report: Vision Statement Vision We desire to become a symbol of quality and trust in public transportation industry. We visualize providing safest and most comfortable means of mobility for people and goods in the most cost-effective, socially responsible and environmentally sustainable manner! Strategy We plan to get closer to our ideal vision through implementing various strategies including the following: Continuous improvement in business processes and methodologies to ensure costs savings and better provision of services; establishment of quality standards, in line with best international practices and enforcing strict compliance with such standards and all other legal, regulatory and voluntary regulatory frameworks; deployment of efficient staff in the fields who are adequately trained in safety measures, customer relationship building and have up to date knowledge; establishment of business continuity plans, disaster recovery and contingency arrangements; total quality management at each step of the process, ensuring doing things right the first time; and research and development aimed to finding modern ways and sources of commuting which is environment friendly and safe to ensure sustainability of limited economic and natural resources. Balanced Scorecard Go Ahead Group Plc. Financial Perspective GOAL (CW 1 ‘Ratio Analysis Current & Previous Year) KPIs (CW 1 Appendix 1) Target Initiative / Action Return on shareholder’s interest Earnings per share Increase by 25% per annum Cost controlling Buy back of shares Cash flows Acid test ratio Liquid assets 2 times the value of current liabilities Generating funds through long-term borrowings Improving inventory turnover period Profitability Net profit margin Increase 5% per annum Pricing strategies to enhance revenue Control financial charges through negotiation and reduced borrowings Working capital Collection periods Increase creditors’ collection period to 120 days Decrease debtors’ collection period to 15 days Training staff to have better skills for negotiating credit terms at time of contracting with vendors Offering incentives and discounts to debtors on prompt payment Establishing standards for selecting vendors and customers with better payment history and credit ratings Customer Perspective GOAL (CW 1 ‘Key Performance Indicators’) KPIs (CW 1 ‘Key Performance Indicators’) Target Initiative / Action Customer satisfaction Punctuality of arrival and departure times (Late trips/Total trips) Maintaining 90% punctuality rate from one year to next Establish systematic scheduling Enforce penalties on employees for delays Environmental responsibility Carbon emission (%) Reduce carbon emission by 20% till 2015 Continuous research and development to find modern ways to do business in environmentally friendly manner Social responsibility Reduction in bus accidents and crimes on railways Reduce accidents by 20% each year Reduce crime rate to 5% Constant monitoring through CCTV to identify any safety risks Establishing safety standards in line with best industry business practices Customer Satisfaction Industry Ranking Achieve position in top 3 tier firms Pricing strategies to achieve cut throat competition Brand loyalty through product differentiation Internal Business Perspective GOAL (CW 1 ‘Ratio Analysis Current & Previous Year) KPIs (CW 1 Appendix 1) Target Initiative / Action Cost efficiency Fuel consumed per km Reducing wastage of fuel by 5% per annum Enforcing monetary penalties on drivers on wastages Purchasing vehicles with more economical fuel consumption rates Quality management Customer complaints per trip Reducing customer complaints to 1% Establishing total quality management Hiring professionally trained staff to cater customers better Allocation of resources Net assets turnover Reducing turnover to 5 days Avoiding breakdowns of vehicles by ensuring timely maintenance Standardization Stoppages per process Reducing stoppages to 1% Enforcing standardized procedures for providing services to customers Preparing standard operating procedures (SOPs) manuals Innovation and Learning Perspective GOAL (CW 1 ‘Ratio Analysis Current & Previous Year) KPIs (CW 1 Appendix 1) Target Initiative / Action Product differentiation Customers’ positive reviews per trip (%) Increase customers’ positive remarks per trip to 75% Conduct surveys to know what customers want and are willing to pay for Secure newer market niches Luxurious arrangements for customers Staff training Trainings per year Increase trainings and seminars to 4 times a year Arrange trainings to teach staff newer techniques, communication skills and internationally acknowledged practices Diversification Revenue per year Increase revenue through diversified products by 5% each year Diversify into newer products within the supply chain or otherwise, to capitalize better return on idle capital Research and development Ranking and Awards Increase public profile, customer ranking and achieving awards for new developments Constant research to find new sustainable ways to conduct business Become the market pioneer for new developed methods Strategy Map Perspective Strategies Financial Cost controlling Buy back of shares Generating funds through long-term borrowings Improving inventory turnover period Pricing strategies to enhance revenue Control financial charges through negotiation and reduced borrowings Training staff to have better skills for negotiating credit terms at time of contracting with vendors Offering incentives and discounts to debtors on prompt payment Establishing standards for selecting vendors and customers with better payment history and credit ratings Customer Establish systematic scheduling Enforce penalties on employees for delays Continuous research and development to find modern ways to do business in environmentally friendly manner Constant monitoring through CCTV to identify any safety risks Establishing safety standards in line with best industry business practices Pricing strategies to achieve cut throat competition Brand loyalty through product differentiation Internal Business Enforcing monetary penalties on drivers on wastages Purchasing vehicles with more economical fuel consumption rates Establishing total quality management Hiring professionally trained staff to cater customers better Avoiding breakdowns of vehicles by ensuring timely maintenance Enforcing standardized procedures for providing services to customers Preparing standard operating procedures (SOPs) manuals Innovation and Learning Conduct surveys to know what customers want and are willing to pay for Secure newer market niches Luxurious arrangements for customers Arrange trainings to teach staff newer techniques, communication skills and internationally acknowledged practices Diversify into newer products within the supply chain or otherwise, to capitalize better return on idle capital Constant research to find new sustainable ways to conduct business Become the market pioneer for new developed methods Recommendations On the basis of the aforementioned facts and figures in the report, we make the following critical recommendations, in order of priority and vitality: 1. Cost controlling techniques – It is highly recommended that the company shall put in place internal controls to restrict costs to appropriate levels. This can be done by controlling financial charges through negotiation over terms of long-term borrowings, procurement of vehicles with more economical fuel consumption rates and conducting research to find modern methods of doing business in a more cost-effective manner. Normal wastages should be controlled by enforcing stringent scheduling and efficient arrival and departure times while eliminating abnormal stoppages, causing extra costs and loss of revenue, by imposing fines on staff for causing any disturbances in planned schedules and incorporating rewarding systems for extra efficiency shown by staff. Also, for controlling costs in the long run, an initial capital expenditure may be incurred on establishing Total Quality Management system whereby focus is laid on doing things right the first time with no after-delivery quality control departments and cutting extra non-value hierarchal lines of staff thus saving costs. Considering from the entrepreneur point of view, extra financial charges being incurred over long term borrowings, causing high gearing for the company as a whole, should also be reduced. This may be done by partially paying off some long-term liabilities and prematurely settling some of its preference-charged debentures and other instruments. 2. Enhancing cash flow position – The Company should focus on improving its cash flow position throughout the year to meet its working capital requirements and to avoid further issue of share capital and/or further borrowings. This can be done by improving inventory turnover period, offering incentives and discounts to debtors on prompt payment and establishing standards for selecting vendors and customers with better payment history and credit ratings. Liquidity can also be enhanced through better assets management such as identifying idle or extra assets and disposing them off, realizing long held securities which do not give sufficient returns and carefully assessing the capital expenditure budgets for the coming period determining if any unreasonable expenditure exists and thereby curtailing on them. 3. Focus on customer satisfaction – The integral part of doing a business lies on how happy and content its customers are! Therefore we emphasize greatly on this perspective. We suggest it can be achieved through reducing customer complaints, systematic scheduling, staff trainings, product differentiation, value-for-money services and being more socially responsible towards general public. It is essential to know how customers perceive our organization and how readily can they switch to another product. To establish customer loyalty, it is necessary to introduce alterations and updates frequently to its services to keep customers’ attention and following on our products. The management should keep a strict monitoring check on its competitors’ tactics and pricing strategies to ensure that company is not charging unreasonably high or low and is offering all competitive facilities and benefits. The company should execute techniques to make switching costs very high for customers in quantitative and qualitative terms to be certain there shall be no lost customers. 4. Environment-friendly concern – We see the company growing only if it is running its business in the most environment-friendly manner. This is very significant and though it may seem just a non-value adding activity with large volumes of cost incurred, it is certainly on the contrary. A ‘green’ company would always attract more customers, repel pressure groups and other regulatory bodies and be sustainable in the long term. It also helps avoiding any legal and non-compliance costs and any notorious media attention. If the organization is known for its environment-concerned public profile, it may get global recognition and be able to bring in foreign customers to its clientele as well. This may in turn help the organization to cover newer territories and enhance its routes on a national and inter-city level thereby increasing its revenue. 5. Improvement of business procedures – On parallel grounds to how company operates in the outside world, with its customers, its vendors and all other stakeholders, it is very important to also keep evolving on the inside. The processes are foundation of the business and once they become obsolete, the business cannot be run further. Therefore, it’s of utmost importance that the company keeps finding better ways of doing business and finding new methods and practices to be more efficient and effective. Once, they are developed, they should be incorporated into the system by standardizing the processes throughout the organization. Nevertheless, cost and quality should not be adversely affected by any such research since they are more significant relatively. For a service industry, internal business processes are run by its employees: there is no product being manufactured but a service is being provided by the employees and hence employees are the process-owners of the company! Therefore, in order to improve processes it is utterly important to have excellent staff. For this purpose, continuing professional development should be made mandatory for existing employees while rigorous hiring procedures should be developed by HR department for inducting new staff into the company including background checks, checking professional qualifications and experience is adequate and difficult interview testing procedures. Use of Balanced Scorecards Practical use The very basic idea behind development of the scorecard was to aid the managers in business environment to exercise control. Accordingly, the essential benefit derived by managers from this tool is the ability to ‘drill down’ filtering out the relevant issues being faced by him and identifying the root causes thereafter. Once manager, cures the cause, he can carry out the business more effectively and hence scorecard came in handy! Seeing picture on a whole for an organization, it gets very difficult to understand how to improve and how to ascertain where the weaknesses lie. However, scorecard ensures to break down it into separately identifiable components which can be later referred to by relevant managers and can be improved in parts. An improvement in each component adds up to enhance corporate profile of the company and hence, the organization prospers at the hands of each of the manager playing his individual part (Cobbold and Lawrie, 2001). The scorecard is a time-saving mechanism. Its ease of use and simplicity takes lesser time for a manager to prepare and greater time for decision making. It sets priorities for several activities of the organization. Once it has been established what activities are to be focused upon, the managers can delegate the other non-value adding or otherwise least prior activities to their subordinates, thereby giving them more time to work effectively for improvement of vital value adding activities. It helps managers to know where they lack and where they have good command. The areas needing more work can then be brought to balance by taking away some resources from other over-efficient activities and deploying them to activities needing attention. This eventually brings both areas to a balance, the weaker areas become strong and stronger areas become lesser but adequately strong, hence the name Balanced scorecard! (European Accounting Review, 2009). Balanced scorecard, though an easy-to-use tool, needs to be carefully designed ensuring that all the goals, measures and targets established are tailored and customized to organization’s own needs. An initial SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) must be considered being conducted to be well aware of how to exploit opportunities through strengths and how to combat threats by reducing weaknesses. Also, an As-is-to-be analysis may be carried out where the management must identify where the company currently lies (as-is), the position where company wants to be in future (to-be) and the resources needed to eliminate the gap. Limitations Having said a lot in favor of the scorecard tool, it shall be only fair to state that it has its share of limitations as well like every tool does. To start with, this approach doesn’t give any reference to the time frame or the sequence of events. The whole mechanism revolves around cause and effect relationship of different perspectives and performance indicators. However, it doesn’t reflect any time constraints or period of time when each should occur. As a result, past events are emphasized upon more to project how the organization is capable of performing instead of considering what potential it holds in the near future. Furthermore, this approach does not take into account all the stakeholders within and outside the organization which are adversely affected by organization’s activities and decisions e.g. competitors, employees etc. (Rillo, 2003). Some other minor limitations and demerits of this strategic tool include its impracticality and unrealistic aspects and its over-emphasis on lagging indicators as compared to many other models which also take into account leading indicators through forecasting and projecting and do not only focus on final results as in the case of balanced scorecard which has its primary focus on achieving favorable results for the organization as a whole, based on past results and established goals and targets (Kanji, 2002). The four aspects discussed in the scorecard are very broad perspectives and need tedious amount of work to design and complete it. If some organization doesn’t want to evaluate itself in a certain perspective because either it doesn’t believe that perspective to be so essential to its context to spend resources on preparing it or otherwise because it is certain and acclaimed to have a good command in that perspective, then the scorecard shall no longer be beneficial for it! Scorecard’s spirit is achieving balance in all perspectives and therefore all perspectives need to be focused on while preparing it and therefore disowning any one of it during preparation would defeat the purpose of this tool. Hence, this tool is limited only to the extent that an organization is willing and capable to put time and resources over its arrangement and it is cost-beneficial for it at the same time. Evaluation Many theorists are of the view that performance measurement systems are not adequate and efficient enough to combat with the ever-changing and evolving business environment needs. The financial view of performance is not true and fair enough and thus something more dynamic and radical is needed. The balanced scorecard sweeps in to resolve this issue because non-financial data provides a vital picture of how the business in progressing in terms of customer satisfaction and business processes! (Kaplan and Norton, 1992). This tool has made radical improvements as claimed by well-known multi-national companies who have implemented it in their systems. However, many underdeveloped and infant enterprises have had difficulties designing and executing it due to its strategic and visionary aspects which immature organizations lack and therefore it is not recommended for them. References (Works Cited) COBBOLD, I., & LAWRIE, G. (2001). The development of the balanced scorecard as a strategic management tool. Performance Measurement Association. Course Work 1, Introduction to Finance and Accounts, Finance and Accounting Class (February 2013) European Accounting Review, Volume 18, Issue 1, first published 15 April 2009 GO AHEAD GROUP PLC. (2011). Annual report and Accounts 2011 [online], Go Ahead Group Plc. [Accessed 24 Feb 2013] GO AHEAD GROUP PLC. (2012). Annual report and Accounts 2012[online], Go Ahead Group Plc. [Accessed 24 Feb 2013] KANJI, G. K. (2002). Business excellence: make it happen. Total Quality Management, 13(8), 1115-1124. KAPLAN, R. S., & NORTON, D. P. (1992). The balanced scorecard: measures that drive performance. PROCTOR, R. (2012). Managerial accounting: decision making and performance management. Harlow, England, Pearson. RILLO, M.(2003). Limitations of Balanced Scorecard. pc. parnu. ee/~ pajusteh/2004/artikkel_13. pdf,(access date 20/02/2005). Read More