Benchmarking - Advantages, Key Performance Indicators, Confidence about Future Performance - Case Study Example

Benchmarking Benchmarking Introduction The benchmarking process is used to set a yardstickagainst which performance is judged. It is set a standard so that a comparison can be made and justified (Sylvia, 2011). Benefits of benchmarking are discussed as follows: Benefits Following are the main advantages of benchmarking (Tim, 2009) 1. Once the benchmarking is done, it is easy to set the goals against that benchmark. For example, profit margin is set as a benchmark then it would be easy to set the target margin as 2% or 20%. 2. Since benchmarking is a target-oriented approach, it then narrows the arenas to work upon. In case of profit margin has to be improved, companies will either focus on cost-reduction of revenue-increase. The strategy will be decided and then targeted efforts will be made to achieve them. This will assist in setting the changes to be made at more pace. 3. Many a time companies are benchmarked against other companies. For example, a logistic company can be benchmarked against a global logistics company. This study will let the local logistic company know the practises of the international market. Such an exposure will broaden the vision of the company. 4. Benchmarking against a competitor ahead will let the company know the processes of the competitor. This will help the company to improvise its own operations, as well. Key Performance Indicators This sentence is much in discussion these days. The concept is very obvious in its words. However it does imply the behavioural and managerial aspects of the thing that is being measured. Sometimes, it is possible that tbe target of cost reduction is completed, but at a high cost. Cost reduction might have been achieved by a cut in the rightful overtime payment to the workers. This will de-motivate the workers. Workers may then start working slowly, which might increase the late delivery or low quality penalties by the suppliers. This de-motivation turns the whole concept in the opposite direction, as what was being measured to be reduced has finally come up with an increase (Robert, 2006). Analysis of Pulsin’ Ltd In the light of the Greiner curve, Pulsin’ Ltd stands at Phase 4 namely Co-ordinations. The company has surpassed the Creativity Phase. It was the initial phase of the product, which was conceived in Bristol University. The company was established by 3 friends, who then sustained informal chains of communications, and more focused on creating and selling. As the products grew, it spread across UK. More products were introduced by Pulsin’ Ltd by that time. The growth in business led the company to the Delegation phase. In that phase, Pulsin’ Ltd owners must have started delegating the operational and tactical operations to the management. At this point of time, Pulsin’ Ltd has sold started selling in products via whole-sellers, retailers and Internet. The Sales expand across Europe. This has made the company to deal from a centralized head quarter. Contrary to the first step of the cycle, where salaries are low, at this stage the salaries are in line with the performance. De-motivation comes because of the audit activities in the entity, which are performed on behalf of the management (Stephen, 2013). Interpretation of Financial Position The company shows outstanding performance. Its profit margin is increasing consistently. Return on Capital Employed has also performed better being 63% in 2013 as compared to 52% in 2008. Though Current ratio is not ideal in 2013 being 1.53, but it was close to 1 in 2012 (1.36) (Roman, Katherine, & Jennifer, 2014). There is a chance of improvement in Current ratio as company maintains more level current assets, which are not required. Stock cycle is increasing which is not a good sign. In 2008, it was 25 corresponding to 67 in 2013. Pulsin’ Ltd needs to take serious steps to improve the days of conversion of stock in cash. Debtor’s collection period is improving. It should be maintained at less than 60 days. Similar is the case with Creditors settlement period. Settlement period is increasing on a yearly basis, which is not a good sign. If Stock turnover is improved then creditor’s settlement period will also improve. Gearing ratio is kept at 0.38 in 2013. This calls for high dividends to be paid as shareholders will not stop from demanding more dividends in absence of borrowings and interest expenses. However, it proves that Pulsin’ Ltd is self-sufficient company not dependent on external borrowings. Pulsin’ Ltd.’s Measure for Next Few Years Pulsin’ Ltd should use the balanced scorecard approach to establish measures (Paul, 2006). Following are the measures with respect to the perspectives illustrated in balanced scorecard approach: Financial Perspectives Financial Statements: Financial statements should be used as a measure. The company’s profit should be used to measure its performance. The cash flow statement will tell about the liquidity position of the company. Balance Sheet helps in identifying the liabilities outstanding and the assets available to meet them. All these statements translate the true picture of operations in figures. Ratios: Financial ratios should be computed from the financial statements. Liquidity ratios are of utmost importance in this industry. The debt to equity ratio should be observed on a continuous basis. Customer Perspectives Loyalty: Customer loyalty is very important in this business as there is always a risk of upcoming products. For establishing loyalties, customer’s track record should be maintained so that the frequency of the purchases by the customers is observed. Marketing: Effective marketing should be conducted. The ratio of the sales to marketing should be studied so that the customers’ behaviour can be noticed. Internal Perspectives Staff: Staff turnover should be restricted as it is our resource. Motivation level of the staff should be noted by way of appraisals and face-to-face meetings. Proper recruitment and trainings should be done so that value addition is created for the entity. System: Timesaving systems should be placed. Un-necessary hierarchies and approval create irritation. Systems should be implemented to avoid any leakages in the stock and other assets of the company. Innovation and Growth Perspective Research and New Products: Researches should be conducted on markets and products. The results of the researched should be observed by way of the reports given by them. Number of new products launched in the year should be observed and the same should be compared with the products launched by competitors. Benchmark Company Reasons for being Confident about future performance Future Performance of Pulsin’ Ltd can be estimated with certainty because company is generating profit consistently since 2008. Although the Profit margin has reduced by 4% in 2014 but it does not mean that the company’s performance is declining. Decrease in Profit margin can be seen as a strategy to confront the competition. This will ensure the existence of the company in the long run. More volumes of sale will be sold which will add to the total profits of the company. Reasons for Fluctuation in Gross Profit % This slight variation is tolerable. It is mainly because of the variation in the proportion of the sales between the protein powders and bars. The estimate of 56% must have been made on the basis of the composition of the sales volume. Since the actual sales of the bar and powders are changing, therefore their relative impact is also coming on the profit margin. There is a difference between the margins of both the product categories. Payment of Dividend in 2011 Dividends are paid in 2011 because earnings per share have increased significantly in 2011. In 2010, earnings per share were 185.51 and in 2011 these were 522.20. Since the company generated sufficient profits, therefore it decided to pay back to the shareholders who have taken so much risk at this new idea. When earnings per share are low, companies normally retain them for future investments. As in 2011, earnings increased, Pulsin’ Ltd paid dividend as residual income was sufficient for future planned investments. Reasons for High Generation of Cash Pulsin’ Ltd. is good at generating cash because it is a low-value running item. It is mostly sold to end consumers via retail shops. Since, Pulsin’ Ltd products are low value; they do not need to be sold on credit. Cash is fetched immediately. 37% of the sales are made through the Internet. Internet transactions generate cash immediately on completion without any risk. 33% of the sales are made via UK whole-sellers. Sales in UK enable quick delivery of the products to the whole-sellers which then sale the same to the retailers in a short time. Such quick process helps fetching the cash in a shorter period of time. Volatility of Stock Levels and the Controls Placed Stock levels are volatile due to change in the priorities of the customers. As Pulsin’ Ltd. is going trans-national, customers belonging to different regions will have their influence directly on the stock levels. This is because priorities in taste changes from country to country. Chinese love salt and Indians like sugar. Pulsin’ Ltd. has its past record of sales being generated from different outlets. It is used to make projections. Yearly sales from different whole-sellers and sources are forecasted. Stocks are produced as per the actual demand keeping in view the future demand. Controls over Debtors There are definitely controls in place to restrict the amount of debts being bad. It is evident from the debtors’ days’ ratio. It is being controlled year after year. In 2008, it was 82 and in 2013, it showed a remarkable improvement at 51 days. This shows that Pulsin’ Ltd is working effectively on converting the debts in the cash at its earliest. This will assist in identifying the bad debts at tender stage. Cash Management No, there is no such risk of cash management. The stock day’s ratio and debtor day’s ratio are getting better each year. This shows that the company is already vigilant regarding its asset management including cash management. However, there is a remote need of hedging in case of the sales increase in other countries excessively (Financial World Publishing, 2000). References Financial World Publishing. (2000). Hedging Currency Exposures. Italy: Leggo Spa. Paul, N. (2006). Balanced Scorecard - Step by Step. New Jersey: John Wiley and Sons. Robert, W. (2006, November 20). Articles. Retrieved from https://www.swspitcrew.com/articles/What%20Gets%20Measured%201106.pdf Roman, W., Katherine, S., & Jennifer, F. (2014). Financial Accounting. Mason: Cengage Learning. Stephen, D. (2013, January 1). Greiners Growth Curve. Retrieved from http://www.slideshare.net/StephenDann1/greiners-growth-curve Sylvia, C. (2011). Benchmarking. Pennsylvania: Gower. Tim, S. (2009). The Benchmarking Book. Oxford: Elseiver Ltd. Read More