The Advantage of Performance Management - Essay Example

2. BUDGETED RETURN ON INVESTMENT for the year ending 31 Dec.2008 Return on investment = operating profit Investment *100 = 42521 *100 4000000 =1.06% PERFORMANCE MANAGEMENT Introduction: Performance management is an important part of the managerial activity in a business enterprise. It refers to the management of the course of actions of the firm in accordance with projected ways. By adopting performance management the firm can easily realise whether the actual working is deviated from the projected action and corrections can be taken in time which is important for attaining the estimated work results in the business. 3. FINANCIAL IMPLICATIONS OF THE SUGESTIONS OF Mr. COPPOCCO: Mr. Coppocco; the manager of the Motel has suggested to the Directors of Spingo Ltd. to reduce the level of room rates in quarter 4 by 20% He reckons the average occupancy rate will increase to 40% if the room rate reduction is proceed by a massive advertising campaign costing 40000 pounds . the expectations of Mr. Coppocco to get 40%of room occupancy by reducing the level of room rate by 20% will amount to get an additional profit of f 487425 to the Motel in the budgeted year. If the suggestions of Mr. Coppocco is based on adequate financial planning the expected profit can be earned. In fact the occupancy rate is based on not only the room rate .there are a number of factors that may affect the reduction in room occupancy. For getting higher occupancy rate all these factors will have to be analysed .It is important to understand what is the reason of expecting a lower occupancy rate in the fourth quarter and that factors will have to be reduced for increasing the occupancy rate of rooms. MEASURES FOR THE PERFORMANCE ASSESSMENT OF MORTEL For measuring the performance of Mortel; the best way is to compare the actual performance with the budgeted performance of the firm .comparison of performance will help to find out the deviation from the expected performance of the firm in the year and it can be corrected in time. Ratio analysis is also used for measuring the financial performance .Ratios aid in the interpretation of finance data and is used in financial statements and reports to compare the relationship between financial elements. Turn over ratios is useful to find the profitability of the firm in connection with its sales revenue. (Chapter 4: Financial Performance Indicators and Measure). Cash flow statement and fund flow statement are also helpful to assess the performance of the firm. Cash flow statement shows the cash receipts and cash payments of the firm which may or may not mentioned in the financial statements. The sources of obtaining the information required for the assessment of performance: For the comparing the actual performance with the expected performance the required information will be get from the financial statements of the firm .The ratio analysis can be done from the figures in the income statement and position statement of the year. PROBLEMS INVOLVED IN EVALUATING INVESTMENTS IN INFORMATION TECHNOLOGY: The directors of Springo are exploring the possibility of upgrading the company’s computer facilities in 2009.The estimated cost requirement of the project is 300000 pounds. Up gradation of computer facility is a must for getting higher efficiency in the operations of the firm in the changing business environment.. The proper investment in information technology will help to improve the organisational performance of the firm. Even though IT investment is potential to improve organisational efficiency .it involves certain risks. The increasing use of IT in business arises the need of evaluating the productivity impacts of IT. The contemporary IT evaluation approach has focused on return on investment and return on management .IT investment has impacts on different stages of business operations .The impacts of IT investment on each stage of the business operations is required to be analysed in detail by suitable methods. Huge investment in IT requires sound financial planning. To accomplish the objective of investment it requires to establish processes ensuring the IT projects are being implemented at acceptable costs and within reasonable timeframes ,and that the project are contributing to tangible ,observable improvements in mission performance. (The Status of Enterprise Architecture and Information Technology Investment Management in the Department of Justice. 2005). The profitability of investment in IT depends upon overall performance of the firm such as human capital, training, IT architecture and software management. In IT investment during the selection phase the firm should select those it projects that will best support its mission needs and identifies and analyses the risks and return of each project .in control phase the firm should ensure that as projects develop and as investment costs rise, the project is continuing to meet mission needs at the expected levels of cost and risk. Deviation from the projected performance will have to be address in time. In the evaluation phase the comparison of actual with the expected performance should have to be undertaken and deviations can be corrected in time. (Accounting and Information Management Division: Information Technology Investment Management. 2000). Before taking the decision to upgrade the computer facility; the directors of Springo wants to check the profitability and rate of return on the projected investment. It should ensure that the up gradation will help to increase the efficiency of the firm to the estimated level. Adequate valuation method can be used by the firm to ensure the profitability of the firm. The risks involved in this investment should have to be deeply analysed for avoiding the loss. CONCLUSION: By preparing the budgeted income statement a firm can assure the profitability of the projected business. It helps them to avoid deviation in the planned project .The budgeted statement can be used for comparing the actual performance of the business. Thus it helps in performance management of the firm which is essential for the profitability and growth of the firm. Bibliography Accounting and Information Management Division: Information Technology Investment Management. (2000). [online]. GAO. Last accessed 22 April 2008 at: http://www.gao.gov/special.pubs/ai10123.pdf Chapter 4: Financial Performance Indicators and Measure. [online]. Forum Guide to Core Finance Data Elements. Last accessed 22 April 2008 at: http://nces.ed.gov/pubs2007/2007801_3.pdf The Status of Enterprise Architecture and Information Technology Investment Management in the Department of Justice. (2005). [online]. US Department of Justice Office of the Inspector General Audit Division. Last accessed 22 April 2008 at: http://www.usdoj.gov/oig/reports/OBD/a0602/final.pdf Read More