401 [EPM] Enterprise Performance Management

Chapter 1

Performance Management & Performance Evaluation Parameters

Performance Management Concept

Performance management is a process that includes setting clear goals, measuring

performance, providing feedback and coaching, recognizing achievements, offering training
and development, linking performance with compensation, and continuously monitoring and
adjusting to improve performance. Its purpose is to enhance employee performance and
contribute to organizational success.

Performance Management Need

 Performance management is important for organizations because it helps align goals,

improve performance, motivate employees, identify training needs, make better
decisions, and continuously improve.
 It involves setting clear objectives, giving feedback and coaching, and evaluating
performance. This makes sure that everyone is working towards the same goals and
doing their best.
 It also helps managers understand how well employees are doing and what support
they need. By recognizing achievements and providing training, it keeps employees
motivated and helps them grow. Overall, performance management helps
organizations work better and achieve success.
 To enable the employees towards achievement of superior standards of work
performance.
 Identifying the barriers to effective performance and resolving those barriers through
constant monitoring, coaching and development interventions.
Features of Performance Management

 Performance management is closely aligned with the organizational context and

culture without being influenced by passing fads and strategically linked to clearly
defined to organizational objectives.
 Performance management system is closely linked to other systems of human
resource management, particularly career planning, succession planning and training
and development.
 Performance management involve effective use of technology in conveying desired
competencies and in monitoring, collecting and giving feedback so there is minimum
possible beaucratisation of administering the system.
 Performance management emphasizes comprehensive training to managers.
 Performance management is a dynamic system.

Linkages with Strategic Planning

Performance management and strategic planning are closely linked in organizations.

Performance management ensures that individual and team goals align with strategic
objectives, measures progress, provides feedback, and drives continuous improvement. It
informs resource allocation decisions and helps track key performance indicators. By
integrating performance management into strategic planning, organizations can ensure that
goals are actively pursued and achieved. This alignment between performance management
and strategic planning helps organizations stay focused on their long-term objectives and
make informed decisions to optimize performance and drive success.
Management Control and Operational Control

Management control and operational control are two important aspects of organizational
control systems.

Management control involves the process of monitoring and influencing the overall direction
and performance of an organization. It focuses on strategic planning, goal setting, and
decision-making at the higher levels of management. Management control systems provide
information, tools, and frameworks to guide the organization towards its strategic objectives.
It includes activities such as financial analysis, performance measurement, and strategic
reviews to ensure that the organization is on track to achieve its goals.

Operational control, on the other hand, deals with the day-to-day activities and processes
within the organization. It focuses on the efficient and effective execution of tasks and
processes to meet operational goals and standards. Operational control involves activities like
setting operational targets, monitoring performance against those targets, and taking
corrective actions as necessary. It is concerned with operational efficiency, quality control,
resource allocation, and adherence to operational procedures.

While management control provides a broader perspective and ensures alignment with
strategic objectives, operational control ensures that activities are executed efficiently and
effectively. Both control mechanisms are essential for organizations to achieve their
objectives by balancing strategic direction and operational excellence. Effective coordination
and integration between management control and operational control are critical for
organizational success.

Process of Performance Management

Performance Evaluation Parameters
Performance evaluation/appraisal is one element of performance management which involves
different measurements throughout the organization. Performance appraisal is the most
important if the organizations are to take the advantage of their most important asset,
employees, and gain human capital advantage.

Management control system (MCS) is use as a tool for controlling in administration.

Obviously managers need criteria to determine how well they do and to control their
performance.

In this case, measuring performance is a important concept in controlling.

MCS helps managers to find information and ensure them those performances and behaviors
of employees are consistent with organization objectives. That is both financial and a non-
financial measure of performance is necessary.
 Performance Evaluation Parameters

Responsibility Accounting Responsibility Centre Performance Measures

 Revenue / Income  Financial Performance

Centre Measure
 Expense / Cost Centre  Non-Financial
 Profit Centre Performance Measure
 Investment Centre

Responsibility Accounting
Responsibility accounting is a kind of management accounting that is accountable for all the
management, budgeting, and internal accounting of a company. The primary objective of this
accounting is to support all the Planning, costing, and responsibility centres of a company.

Responsibility accounting may be defined as a part of Management Information System , which

envisages compilation of data relating to revenue, cost, and profit in respect of an individual
management personnel, who is directly responsible for them. After compilation of such data, they are
transmitted to the persons of next higher management level, who can 1. Take necessary action, if any
required, and 2. Measure the performance of the concerned personnel.

According to Anthony and Reece, “Responsibility accounting is that type of management accounting
that collects and reports both planned and actual accounting information in terms of responsibility
centres”.
Features of Responsibility Accounting

1. Inputs and Output or Cost and Revenues

2. Planned and Actual Information or use of Budgeting
3. Identification of Responsibility Centres
4. Relationship between organizational structure and responsibility accounting system.
5. Assigning cost to individuals and limiting their efforts to controllable costs.
6. Transfer pricing policy
7. Performance reporting
8. Participative management

Objectives of Responsibility Accounting

1. To control costs, revenue and financial resources

2. To facilitate the evaluation of divisional or departmental Performances,
3. To determine the contribution to income of each responsibility center,
4. To motivate supervisors to attain their objectives
5. To assure management of goal congruence in the organization.

Assumptions of Responsibility Accounting

1. Goals and responsibilities set out by the management are attainable with efficient and
effective performance.
2. Employees of the organization give their best effort to achieve the goals and
responsibilities delegated upon them.
3. Employees are held responsible for the areas over which they exercise control.
4. Performance of the employees is evaluated by the higher management through
feedback reports at regular intervals.
5. Performance evaluation process of the employees is based on reward-providing
nature.

Responsibility Centres

A responsibility center is an operational unit or entity within an organization, that is

responsible for all the activities and tasks structured for that unit. These centers have their
own goal, staffs, objectives, policies and procedures, and financial reports. And are used
to balance responsibilities related to expenses incurred, revenue generated, and funds
invested to an individual.

In a multinational or large corporation, the organization tasks are divided into a subtask,
and each task is given to various small division or groups. In this context, all groups in
that organization are responsibility centers.
Types of Responsibility Centre:
 Cost Centre- A Cost Centre is a department or a unit which supervises, allocates,
segregates, and eliminates all sorts of the cost related to a company. The cost center
prime work is to check the cost of an organization and to limit the unwanted
expenditure the company may acquire. The cost can be the determination of both
person and location. In multinational companies, the cost center is authorized to
decrease and manage the cost.
 Revenue Centre- This center is accountable for initiating and monitoring revenue.
The management does not have any control over the cost or investment but can
monitor a few of the expenses in the marketing section. The production of the revenue
center is calculated by analyzing the budgeted revenue with actual revenue and actual
marketing expenses with budgeted marketing expenses.
 Profit Centre-It is a division or department of a company which operates for the
calculation of profit. In an organization, different profit centers are managed by the
managers, who identifies profits on the basis of costs and incomes. Profit Centre is
accountable for all the actions associated with the sales of goods and production.
 Investment Centre- This center is responsible for both investments and revenue. The
investment manager can control expenses, income, the fund invested in assets, etc. He
also has the authority to form a credit policy, which has an immediate impact on debt
collection.

Financial Performance Measures

Financial performance measures are based on financial performance information – both
internal and external. For example, profitability, stock price, etc.

It is important to note in this context that financial measures are long-term measures and,
needless to mention that it is non-financial measures which affect financial measures in the
future. It has been rightly observed by Horngren, Datar and Foster that “ the financial benefits
of these long-run changes may not appear immediately in short-run earnings, but strong
improvement in non-financial measures is an indicator of economic value creation in the
futue.

Following are the financial measures to evaluate performance:

1. Residual Income ( RI )
2. Return on Investment ( ROI )
3. Return on Assets ( ROA )
4. Market Value Added ( MVA )
5. Economic Value Added ( EVA )
6. DuPont Analysis
A Flow chart covering all aspect of RI Method is shown in figure

Income or Profit
before Interest and
Tax

(-)

Residual Income (RI) =

Less

Required Rate of

Return x Investment Imputed cost of

(Capital)
Investment

Representing
Opportunity
Cost

Residual income is the amount by which actual operating income exceeds the minimum
required income.

Minimum Required Income = Required Rate of Return x Average operating Assets

Residual Income = Net Operating Income – Minimum Required Income

DuPont Analysis

A DuPont analysis is used to evaluate the component parts of a company's ROE. This allows
an investor to determine what financial activities contribute the most to the changes in ROE.
An investor can use tools like this to compare the operational efficiency of two similar
firms.

DuPont Analysis = Net Profit Margin × Asset Turnover × Equity Multiplier

Return on Equity = (Net Profit / Sales) x (Sales/Assets) x (Assets/ Equity)

Return on Investment ratio = (net income / sales) x (sales/ total assets) x (net income / total assets)

DuPont Analysis vs. Return on Equity

DuPont analysis breaks ROE down into smaller components– three or five steps. ROE is the resulting
figure, but DuPont analysis provides the necessary breakdown as to how the company reached that
ROE figure. It allows financial statement users to more specifically analyze the areas in which a
company is doing well and highlights the areas it needs to work on.

DuPont Analysis Limitations

The main limitation of DuPont analysis is that it relies on financial statement data that can be
manipulated to some degree based on accounting policies and management strategies. The financial
information used to calculate ROE in DuPont analysis may be more or less accurate based on the
quality of its inputs.

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 EPM Chapter 2 Non-Financial Performance Evaluation Parameters

Non-Financial Performance Measures

Meaning:

Nonfinancial measures are superior predictors of the future economic performance of the
firm. They act as a missing link between the value-driving activities and economic
performance of the firm. They are also more closely tied to the corporate and business-level
strategy of the firms.

Non-Financial areas include:

1. Constant watch on customer sentiments.

2. Reviewing the organizational efficiency time-to-time.
3. Effectiveness of human resource management.
4. Developing work-culture among employees as well as management.
5. Just in time delivery of goods.
6. Product guarantee.
7. After sale service.
8. Innovation in product design.
9. Market research for the expansion of marketing of product.

Measures of Non-Financial Performance

Measures of Non-Financial Performance

Balance Scorecard

Malcolm Baldrige Framework

Balance Scorecard: The Balanced Scorecard (BSC) is a strategic framework that connects a
company’s vision with its goals, measures, targets, and initiatives. It provides a
comprehensive approach to business performance management, incorporating financial
measures and performance metrics. This framework helps in implementing and managing
strategies effectively, ensuring a balanced approach across all areas of the organization.

A balanced scorecard (BSC) is defined as a management system that provides feedback on

both internal business processes and external outcomes to continuously improve strategic
performance and results. By bringing together measures around internal processes and
external outcomes, a balanced scorecard supports continuous improvement at the level of
strategic performance and results.

The balanced scorecard is a strategic management tool that views the organization from
different perspectives, usually the following:

 Financial: The perspective of your shareholders

 Customer: What your customers experience and perceive

 Business process: The key processes you use to meet and exceed customer and
shareholder requirements

 Learning and growth: How you foster ongoing change and continuous improvement

Principle of Effective Balance Scorecard

1. Obtaining senior leadership involvement.

2. Articulating the firm’s business vision and strategy.
3. Identifying the performance categories that link vision and strategy to results.
4. Cascading the scorecard to team, division and functional levels.
5. Developing effective measures and meaningful standards (both short- and long- term,
leading and lagging).
6. Deploying appropriate, IT, communication and reward systems.
7. Viewing the BSC as a continuous process, requiring maintenance, and reassessment
and updating.
8. Believing in the BSC as a facilitator of organizational and cultural change.

Four Perspective of Balanced Scorecard

BSCs were originally meant for for-profit companies but were later adapted for nonprofit
organizations and government agencies. It is meant to measure the intellectual capital of a
company, such as training, skills, knowledge, and any other proprietary information that
gives it a competitive advantage in the market. The balanced scorecard model reinforces good
behavior in an organization by isolating four separate areas that need to be analyzed. These
four areas, also called legs, involve:

 Learning and growth

 Business processes

 Customers

 Finance
Characteristics of the Balanced Scorecard Model (BSC)

Information is collected and analyzed from four aspects of a business:1

1. Learning and growth are analyzed through the investigation of training and
knowledge resources. This first leg handles how well information is captured and how
effectively employees use that information to convert it to a competitive
advantage within the industry.

2. Business processes are evaluated by investigating how well products are

manufactured. Operational management is analyzed to track any gaps, delays,
bottlenecks, shortages, or waste.

3. Customer perspectives are collected to gauge customer satisfaction with the quality,
price, and availability of products or services. Customers provide feedback about their
satisfaction with current products.

4. Financial data, such as sales, expenditures, and income are used to understand
financial performance. These financial metrics may include dollar amounts, financial
ratios, budget variances, or income targets.

Malcolm Baldrige Framework (MBNQA):

The Malcolm Baldrige National Quality Award (MBNQA) is an award established by the
U.S. Congress in 1987 to raise awareness of quality management and recognize U.S.
companies that have implemented successful quality management systems. The award is the
nation's highest presidential honor for performance excellence.

Three MBNQA awards can be given annually in six categories:

 Manufacturing

 Service Company

 Small Business

 Education

 Healthcare

 Non-profit
THE SEVEN MBNQA CRITERIA CATEGORIES

Organizations that apply for the MBNQA are judged by an independent board of examiners.
Recipients are selected based on achievement and improvement in seven areas, known as the
Baldrige Criteria for Performance Excellence:

1. Leadership: How upper management leads the organization, and how the
organization leads within the community.

2. Strategy: How the organization establishes and plans to implement strategic

directions.

3. Customers: How the organization builds and maintains strong, lasting relationships
with customers.

4. Measurement, analysis, and knowledge management: How the organization uses

data to support key processes and manage performance.

5. Workforce: How the organization empowers and involves its workforce.

6. Operations: How the organization designs, manages, and improves key processes.

7. Results: How the organization performs in terms of customer satisfaction, finances,

human resources, supplier and partner performance, operations, governance and social
responsibility, and how the organization compares to its competitors.

Framework of MBNQA :

The Baldrige Award has seven categories. Each category is assigned a maximum point value
as follows :

1) Leadership -

i) Senior Executive Leadership :

Evaluates the senior leadership and personal involvement in setting direction, developing and
maintaining a performance-oriented leadership system.

ii) Leadership System and Organisation :

Assesses how the organisation's customer focus and performance expectations are reflected in
the leadership system as well as the ensuing management and organisation.

iii) Public Responsibility and Corporate Citizenship :

Evaluates how the company addresses its responsibilities to the public in its performance
management practices.
2) Information and Analysis -

i) Management of Information and Data :

Evaluates the company's determination and management of information and data that are
subsequently used for strategic planning, management, and overall performance.

ii) Competitive Comparisons and Benchmarking :

Evaluates the company's processes and usage of comparison data to improve the overall
performance and competitive position.

iii) Analysis and Use of Company Level Data :

Assesses how quality, customer, operational performance, and relevant financial data are
analysed and used to support company level reviews, actions, and planning.

3) Strategic Planning -

i) Strategic Development :

Evaluates the short-term and long-term strategic planning process for competitive leadership
and overall operational performance excellence.

ii) Strategic Deployment :

Assesses the development and deployment of the key business drivers.

4) Human Resource Development and Management -

i) Human Resource Planning and Evaluation :

Assesses the human resource planning and evaluation as well as its alignment and integration
into the strategic plan. The development and overall well-being of the workforce are also
analyzed in this section.

ii) High Performance Work Systems:

Evaluates how the company's job design and recognition programs motivate the employees to
high performance.

iii) Employee Education, Training, and Development:

Evaluates how the education and training fit in with the company's plans, inclusive of growth
of company capabilities and motivation.
iv) Employee Well-Being and Satisfaction :

Evaluates bow the company maintains a conducive work environment and sustains the well-
being and development of employees.

5) Process Management -

i) Design and Introduction of Quality Products and Services :

Evaluates how new and improved products and services are introduced and how the
processes (from manufacture to delivery) are designed to accommodate key product and
service quality requirements.

ii) Process Management - Product and Service Production and Delivery :

Assesses the management of production and delivery processes to ensure quality and
operational performance.

iii) Process Management - Support Services :

Assesses key support services and the management approach to ensure quality and
continuous improvement.

iv) Management of Supplier Performance :

Evaluates how the company's materials, components, and other supplier-furnished services
meet the company's quality requirements.

6) Business Results –

i) Product and Service Quality Results :

Evaluates the performance results of products and services using

key performance measures and indicators.

ii) Company Operational and Financial Results :

Evaluates the operational performance, financial performance, and improvement efforts using
key measures and indicators.

iii) Human Resource Results :

Assesses human resource results inclusive of the development and well being of employees.

iv) Supplier Performance Results :

Evaluates the results of supplier performance and process improvement initiatives using key
measures and indicators.
7) Customer Focus and Satisfaction -

i) Customer Market and Knowledge :

Assesses how the company establishes short-term and long-term customer requirements and
develops strategies to understand and anticipate customer needs.

ii) Customer Relationship Management :

Evaluates management responses and follow-ups with customers in an effort to establish and
build relationships, increase knowledge about their customers, improve customer
performance, and generate new and improved ideas for products and services.

iii) Customer Satisfaction Determination :

Assesses how the company determines customer satisfaction and how their customer
satisfaction compares to competitors.

iv) Customer Satisfaction Results :

Assesses how the company measures customer satisfaction using key performance measures
and indicators.

Advantages of MBNQA:

The advantages of MBNQA are as follows:

1. Recognises the achievements of those companies that improve the quality of their
goods and services and providing an example to others.

2. Helps in achieving sustainable results in today's challenging environment.

3. Helps organisations to think strategically.

4. Helps American companies to improve quality and productivity for the pride of
recognition while obtaining a competitive edge through increased profits.

5. Establishing guidelines and criteria that can be used by business, industrial,

governmental and other enterprises in evaluating their own quality improvement
efforts.

6. Providing specific guidance for other American enterprises that wish to learn how to
manage for high quality by making available detailed information on how winning
enterprises were able to change their cultures and achieve eminence.

7. Helps companies align processes, people, resources, and customers' needs.

Disadvantages of MBNQA:

1) Use the Award's Assessment Process and not the Award

2) Over-Advertisement
3) Incremental improvements
4) Baldrige Award is Division-Based and not Organization-Wide :
5) Narrow Focus :
6) Applying for the Award is too Expensive :

Measuring SUB level Performance

A strategic business unit (SBU) in business strategic management, is a profit center which
focuses on product offering and market segment. SBUs typically have a discrete marketing
plan, analysis of competition, and marketing campaign, even though they may be part of a
larger business entity.

Need of SBUs

 To ensure that a certain product or product line is promoted and handled as though it
were an independent business.
 To ensure that each product or product line of the hundreds offered by the company
would receive the same attention as if it were developed, produced and marketed by
an independent company.
 To provide assurance that a product will not get lost among other products (usually
those with larger sales & Profits) in a large company.

Dimension of SBUs
Advantages of SBUs

1. Decentralization of Authority
2. Better Co-ordination
3. Fast Formulation and Effective Implementation of Strategies
4. Assured Accountability

Disadvantages of SBUs

1. Increase in operating Cost

2. Gap between Divisions and Head Office
3. Reduced Flexibility
4. Dirty Politics and Unwanted Competition

Goal Congruence

Goal congruence refers to a scenario where individuals working at different levels have goals
and objectives that coincide with those of the organizations or entities they are associated
with. In simple terms, different interest groups coincide with working towards a collective
goal well aligned with the organization’s objective.

 Goal congruence involves harmonizing individual goals at different levels with the
organization’s goal.

 When people or groups work together towards a common goal, better results and swift
growth are expected with long-term visions and targets.

 Company management, hiring, and daily operations are affected if employee and
organizational goals are not aligned.

 There is no set way of achieving goal unity. The method applied by the company
varies based on the structure, thought process, and workplace environment.

Factors

The factors that influence this congruence can either be internal or external.

#1 – Internal Factors

Internal factors are the determinants that exist within the organization but are controlled by
the management or superior authorities. Some of them include:

 Culture

Each person has a set of beliefs and value systems. Similarly, the company has its own
culture, which plays a crucial role in designing a balanced model.
  Management style

The way the management works is essential. People often refrain from working in a set
management style where they must follow a strict pattern or adhere to organizational
protocols. However, a working environment must have discipline for all employees to follow.
This helps maintain proper organizational structure.

 Lack of communication

Multilevel organizations often struggle with communication breakdowns. This hinders the
spread of the company’s vision and goals. When individuals work with different agendas at
each level, comprehending long-term goals becomes challenging.

#2 – External Factors

Below are the factors that exist outside the organization:

 Physical barriers

Surveillance, locked doors, system passwords, and hierarchy affect organizational and
employee goal unity. This factor creates unknown rifts among employees and sometimes
between employees and the organization or entity.

 Set guidelines

Employees prefer autonomy in their workspaces. It becomes challenging for them to work
under strict guidelines and keep track of manuals and regulations.

 Control systems

When tasks are automated or semi-automated, they work in a set order. This hinders the
workability issues of employees in an organization, barring them from using a particular
function. This eventually influences the goal congruence.

Transfer Pricing

Transfer pricing is the general term for the pricing of cross-border, intra-firm transactions
between related parties. “Transfer pricing” therefore refers to the setting of prices at which
transactions occur involving the transfer of property or services between associated
enterprises, forming part of an MNE group.
Objectives of Transfer Pricing

Factors to Consider in Selecting a Transfer Price

Benefits of Transfer Pricing

1. Transfer pricing helps in reducing duty costs by shipping goods into countries with
high tariff rates by using low transfer prices so that the duty base of such transactions
is lowered.

2. Reducing income and corporate taxes in high tax countries by overpricing goods that
are transferred to countries with lower tax rates helps companies obtain higher profit
margins.
Risks

1. There can be disagreements within the divisions of an organization regarding the

policies on pricing and transfer.

2. Lots of additional costs are incurred in terms of time and manpower required in
executing transfer prices and maintaining a proper accounting system to support them.
Transfer pricing is a very complicated and time-consuming methodology.

3. It gets difficult to establish prices for intangible items such as services rendered,
which are not sold externally.

4. Sellers and buyers perform different functions and, thus, assume different types of
risks. For instance, the seller may refuse to provide a warranty for the product. But the
price paid by the buyer would be affected by the difference.

Comparison of Transfer-Pricing Methods

Performance Evaluation Parameters: Responsibility Accounting, Responsibility Centre,

Performance Measures.

1. Responsibility Accounting:

In a manufacturing company, responsibility accounting can be applied to the production

department. The department manager is assigned responsibility for controlling costs, such as
raw materials, labor, and overhead expenses, associated with the production process. The
manager's performance is evaluated based on factors like cost variances, production
efficiency, and adherence to budgeted targets.

2. Responsibility Centers:

a) Cost Center: In a retail organization, the warehousing and distribution department can be
considered a cost center. Its primary responsibility is to efficiently manage inventory and
handle the logistics of product distribution. Performance measures for this cost center may
include metrics like inventory holding costs, order accuracy, and warehouse efficiency.

b) Revenue Center: In a sales organization, the regional sales teams can be designated as
revenue centers. Each team is responsible for generating sales within their assigned
territories. Performance measures for revenue centers may include total sales revenue, sales
growth rate, market share, and customer acquisition metrics.

c) Profit Center: Within a banking institution, individual branches can be treated as profit
centers. Branch managers are accountable for managing both revenue generation and cost
control. Performance measures for profit centers could include net profit margin, return on
assets, loan portfolio quality, and customer satisfaction ratings.

3. Performance Measures:

a) Financial Measures: For a software development company, financial measures such as

revenue per product line, gross profit margin, and return on investment can be used to
evaluate the performance of different software development projects.

b) Operational Measures: In a healthcare organization, operational measures like patient wait

times, bed occupancy rates, and patient satisfaction scores can be employed to assess the
performance of various departments, such as emergency services or outpatient clinics.

c) Customer Satisfaction Measures: In a hospitality industry setting, customer satisfaction

surveys, online reviews, and repeat customer rates can be utilized as performance measures to
evaluate the effectiveness of different hotel properties or restaurant branches.

These examples demonstrate how responsibility accounting, responsibility centers, and

performance measures can be applied across various industries and organizational functions
to assess and manage performance effectively.

In addition to the examples provided above, the concepts of Return on Investment (ROI) and
Return on Capital Employed (ROCE), as well as Return on Equity (ROE) and Return on Net
worth (RONW) ratios, are commonly used performance measures in financial analysis.
Here's how they can be applied:

1. ROI/ROCE (Return on Investment/Return on Capital Employed):

ROI and ROCE are financial performance measures that assess the efficiency and
profitability of an investment or capital employed in a business.
Example: In a manufacturing company, ROI or ROCE can be used to evaluate the
performance of an investment in a new production line. The ROI/ROCE ratio would be
calculated by dividing the net profit generated by the new production line by the capital
invested in it (or the average capital employed). A higher ROI/ROCE indicates a more
effective utilization of capital and a better return on the investment.

2. ROE/RONW (Return on Equity/Return on Net Worth):

ROE and RONW are financial performance measures that evaluate the profitability and
efficiency of a company in generating returns for its shareholders' equity or net worth.

Example: In a publicly traded company, ROE or RONW can be used to assess the
performance of shareholders' equity or net worth. The ROE/ RONW ratio is calculated by
dividing the net income of the company by the average shareholders' equity (or net worth)
during a specific period. A higher ROE/ RONW indicates that the company is generating
higher returns for its shareholders' equity or net worth.

These financial ratios provide valuable insights into the profitability and efficiency of
investments and the ability of a company to generate returns for its shareholders. They are
commonly used performance measures in financial analysis to evaluate the financial health
and performance of organizations.

The balanced scorecard and the Malcolm Baldrige Framework are two popular approaches
used for measuring performance at the strategic business unit (SBU) level. These concepts
are closely linked to enterprise performance management and address the need for a
comprehensive evaluation of organizational performance.

The Malcolm Baldrige Framework, on the other hand, is a comprehensive performance

management framework that focuses on continuous improvement, innovation, and
excellence. It provides a structured approach for assessing and improving performance based
on seven categories: leadership, strategy, customers, measurement, analysis and knowledge
management, workforce, operations, and results. The framework helps SBUs evaluate their
performance against established criteria and identify areas for improvement across various
aspects of their operations.

Measuring SBU level performance using these frameworks is important for several
reasons:

1. Comprehensive Performance Assessment: The balanced scorecard and the Malcolm

Baldrige Framework offer a holistic approach to performance measurement,
considering both financial and non-financial factors. This allows SBUs to assess their
performance in a well-rounded manner and identify areas of strength and weakness.

2. Strategic Alignment: These frameworks enable SBUs to align their performance

measures and activities with the broader organizational strategy. By setting objectives
and indicators that reflect strategic goals, SBUs can ensure that their efforts are in line
with the overall direction of the enterprise.
 3. Goal Setting and Performance Monitoring: The frameworks provide a structured
approach to goal setting and performance monitoring. They help SBUs set specific
targets, track progress, and evaluate performance against predefined criteria. This
allows for better accountability and transparency within the organization.

4. Continuous Improvement: Both frameworks emphasize the importance of continuous

improvement and learning. By regularly evaluating performance and identifying areas
for enhancement, SBUs can drive a culture of continuous improvement and
innovation, leading to sustained success.

Linkages with enterprise performance management:

The concepts of measuring SBU level performance using the balanced scorecard, Malcolm
Baldrige Framework, and other similar approaches are closely linked to enterprise
performance management. Enterprise performance management encompasses the processes,
methodologies, and tools used to define, measure, monitor, and improve organizational
performance as a whole.

By employing frameworks like the balanced scorecard and the Malcolm Baldrige Framework
at the SBU level, organizations can gather data and insights that feed into the overall
enterprise performance management system. The performance measures and results obtained
from SBUs provide valuable information for decision-making, resource allocation, and
strategic planning at the enterprise level. This integration ensures that performance
management efforts at the SBU level align with and contribute to the broader organizational
goals and objectives.

Overall, measuring SBU level performance using frameworks like the balanced scorecard and
the Malcolm Baldrige Framework is vital for a comprehensive evaluation of organizational
performance. It facilitates strategic alignment, goal setting, continuous improvement, and
enhances the effectiveness of enterprise performance management.

5. Transfer Pricing: Transfer pricing refers to the pricing of goods, services, or

intangible assets transferred between different entities within the same multinational
company. It involves determining the price at which these transactions occur, as if they were
happening between unrelated parties. Transfer pricing is important because it affects the
allocation of profits, tax liabilities, and financial performance of the involved entities. The
main objective of transfer pricing is to ensure that transactions between related entities are
conducted on an arm's length basis, meaning the prices are set as if they were negotiated
between unrelated parties in an open market. This helps prevent the shifting of profits
between entities to take advantage of tax differences across jurisdictions.
Unit – 3 Capital Expenditure Control & Performance Evaluation for Projects

Concept of Capital Budgeting

Capital investments are long-term investments in which the assets involved have useful lives
of multiple years. For example, constructing a new production facility and investing in
machinery and equipment are capital investments. Capital budgeting is a method of
estimating the financial viability of a capital investment over the life of the investment.

Unlike some other types of investment analysis, capital budgeting focuses on cash flows
rather than profits. Capital budgeting involves identifying the cash in flows and cash out
flows rather than accounting revenues and expenses flowing from the investment. For
example, non-expense items like debt principal payments are included in capital budgeting
because they are cash flow transactions. Conversely, non-cash expenses like depreciation are
not included in capital budgeting (except to the extent they impact tax calculations for "after
tax" cash flows) because they are not cash transactions. Instead, the cash flow expenditures
associated with the actual purchase and/or financing of a capital asset are included in the
analysis.

According to Charles T Horngren, “ Capital budget is essentially a list of what management

believes to be worthwhile projects for the acquisition of new capital assets together with the
estimated cost of each product”.

Features of Capital Budgeting

1. Only the long-term investment proposals are subject to capital budgeting

technique.
2. Proposed investments are made in the present, but the returns of such
investments accrued over a number of years in future.
3. While undertaking the exercise of capital Budgeting in respect of an
investment proposal, expenditure and projected return are measured in terms
of cash flow, cash outflow and cash inflow respectively.
4. Maximization of value of the business organization should be the sole criteria
for selecting or dropping of an investment proposal.

Need for Capital Budgeting

 Maintaining Firm’s Competitiveness

 Planning for Future Needs of the Firm
 Coordinating
 Cost Control
 Company’s Effectiveness
Types of Capital Budgeting

Types of Capital Budgeting

 Expansion and Diversification

 Replacement and Modernization
 Mutually Exclusive
 Independent Investments
 Contingent Investments
 Research and Development Projects
 Miscellaneous Projects

Process of Capital Budgeting

The process of Capital Budgeting involves the following points:

Identifying and generating projects

Investment proposals are the first step in capital budgeting. Taking up investments in a
business can be motivated by a number of reasons. There could be the addition or expansion
of a product line. An increase in production or a decrease in production costs could also be
suggested.

Evaluating the project

It mainly consists of selecting all criteria necessary for judging the need for a proposal. In
order to maximize market value, it has to match the company's mission. It is crucial to
consider the time value of money here.

In addition to estimating the benefits and costs, you should weigh the pros and cons
associated with the process. There could be a lot of risks involved with the total cash inflows
and outflows. This needs to be scrutinized thoroughly before moving ahead.

Selecting a Project

Since there is no ‘one-size-fits-all’ factor, there is no defined technique for selecting a

project. Every business has diverse requirements and therefore, the approval over a project
comes based on the objectives of the organization.

After the project has been finalized, the other components need to be attended to. These
include the acquisition of funds which can be explored by the finance department of the
company. The companies need to explore all the options before concluding and approving the
project. Besides, the factors like viability, profitability, and market conditions also play a
vital role in the selection of the project.
Implementation

Once the project is implemented, now come the other critical elements such as completing it
in the stipulated time frame or reduction of costs. Hereafter, the management takes charge of
monitoring the impact of implementing the project.

Performance Review

This involves the process of analyzing and assessing the actual results over the estimated
outcomes. This step helps the management identify the flaws and eliminate them for future
proposals.

Factors Affecting Capital Budgeting

So far in the article, we have observed how measurability and accountability are two primary
aspects that achieve the center stage through capital budgeting. However, while on the path to
accomplish a competent capital budgeting process, you may come across various factors that
may affect it.

Let us move on to observing the factors that affect the capital budgeting process.

Factors Affecting Capital Budgeting

Capital Return

Accounting Methods

Structure of Capital

Availability of Funds

Management decisions

Government Policies

Working Capital

Need of the project

Lending terms of financial institutions

Earnings

Taxation Policies

The economic value of the project

Objectives of Capital Budgeting

The following points present the objectives of the capital budgeting:

 Capital Expenditure Control: Organizations need to estimate the cost of

investment as it allows them to control and manage the required capital
expenditures.

 Selecting Profitable Projects: The company will have to select the most
appropriate project from the multiple possibilities in front of it.

 Identification of Source of funds: The businesses need to locate and select the
most viable and apt source of funds for long-term capital investment. It needs to
compare the various costs like the costs of borrowing and the cost of expected
profits.

Limitation of Capital Budgeting

LIMITATIONS OF CAPITAL BUDGETING

Cash Flows

Time Horizon

Time Value

Discount Rates

Techniques of Capital Expenditure

Techniques of Capital Expenditure

Traditional / Non- Discounted Cash Flow

Discounted Techniques (DCF) Techniques

 Payback Period Method  Net Present Value

 Accounting Rate of Return  Internal Rate of Return
 Profitability Index
Payback period method

Payback period is defined as the number of years required to recover the original cash
investment. In other words, it is the period of time at the end of which a machine, facility, or
other investment has produced sufficient net revenue to recover its investment costs. This is
further explained in Chapter 16.

If P is the payback period in number of years, Ci and Cs are the initial cash investment and the
final scrap value at the end of the period, respectively, and Ca is the average annual cash flow,
then:

𝑃=𝐶𝑖−𝐶𝑠/𝐶𝑎

If the payback period calculated as above is less than the minimum acceptable then the
decision should be to procure the new equipment.

Calculation of the Payback Period:

1. Equal Annual Cash Inflows: When the revenue generate (cash Inflow)
during the implementation of a the payback period is simple, it can be arrived
at by dividing the cash outflow by cash inflow per annum (the amount of
annuity).

The formulas used in this situation are as under:

Payback Period = Initial outflow of the project / Annual Cash Inflow

2. Unequal Annual Cash Inflows: When the revenue generated (cash Inflow)
during the implementation of the project is different every year (not in annuity
form), then the cumulative figure of annual cash inflows are taken for
calculating the payback period.

Accounting Rate of Return (ARR) Method

The ARR may also be termed as return on Investment (ROI). It is the ratio of ‘Average Profit
(after tax)’ to ‘Average Investment’.

Capital investment proposals under ‘Accounting Rate of Return (ARR) Method’ are
evaluated according to their profitability level. ‘Capital Employed’ and Income Generated’
during the entire economic life of a project are arrived at in conformity with the “Generally
Accepted Accounting Principles (GAAP)”. This will help in computing average yield of
projects.
Calculation of ARR

ARR is computed by following two formulae:

ARR = Average Annual Earnings after Tax X 100

Average or Initial Investment

Net Present Value (NPV) Method: Net present value (NPV) is used to calculate the current
value of a future stream of payments from a company, project, or investment. To calculate
NPV, you need to estimate the timing and amount of future cash flows and pick a discount
rate equal to the minimum acceptable rate of return.

Calculation of NPV

The Net Present Value analysis of an investment proposal involves following four steps:

1. A table is prepared showing the cash inflows year – wise during the entire
project life.
2. Present value of each cash inflow is calculated by using a discount rate that
reflects the cost of acquiring the invested capital. This discount rate is often
called the hurdle rate or minimum desired rate of return.
3. The sum of the present values of all the cash-inflows gives the total present
value.
4. The difference between the total present value of cash inflow and total cash
outflow (capital outlay) is arrived which is called Net Present Value (NPV).
5. The decision is based on NPV results.

If the Net Present Value is equal to or greater than zero, the investment proposal is accepted.
If it is less than zero (i.e. negative), it is rejected.

Formula:
Where, PV = Present value

R = Rate of interest/discount rate;

N = Number of years

When cash inflows of the project are not equal or uneven, following formula will be used:

NPV = Present Value of Cash Inflows – Present Value of Cash Outflows

Internal Rate of Return (IIR) Method: The internal rate of return (IRR) is a rate of return
on an investment. The IRR of an investment is the interest rate that gives it a net present
value of 0, or where the sum of discounted cash flow is equal to the investment. The IRR is
calculated by trial and error.

How to Calculate the IRR

The manual calculation of the IRR metric involves the following steps:

1. Using the formula, one would set NPV equal to zero and solve for the discount rate,
which is the IRR.

2. Note that the initial investment is always negative because it represents an outflow.

3. Each subsequent cash flow could be positive or negative, depending on the estimates
of what the project delivers or requires as a capital injection in the future.

When the Annual Cash Inflows are Equal: the project with uniform cash inflows year after
year during their lifetime, IIR is computed by finding Present Value (PV) factor in the
following manner:

Present Value Factor = Initial Investment

Average Annual Cash Inflow

IRR = X + Px – I (Y-X)

Px - Py

Where,

IRR = Internal rate of return,

Y = Higher discount rate

X = Lower discount rate

Px = Present value of cash inflows at X

Py = Present value of cash inflow at Y

I = Initial Investment

Profitability Index (PI) Method: The profitability index (PI) is a measure of a project's or
investment's attractiveness. The PI is calculated by dividing the present value of future
expected cash flows by the initial investment amount in the project.

Calculation of PI

The efficiency and effectiveness of a proposed investment may be accessed through various
methods; profitability index is one of them. Measurement of PI is carried out with the help of
following Formula:

Profitability Index (PI) = Present Value of Cash Inflows

Present Value of Cash Outflow

Or

Present Value of Cash Inflows

Initial Cash Outflows or Outlay or Initial Investment

The profitability index may be found for net present values of inflows:

PI (Net) = NPV (Net Present Value)

Initial Cash Outflows

Or

PI (Net) = PV of Cash Inflows

Initial Cash Outflows

PI (Net) = PV of Cash Inflows

Initial Cash Outflow

The net profitability index can also be found as profitability index (gross) minus one.

Decision Rule When PI is used to make a decision regarding acceptance or rejection of a

proposal, the decision criteria are as follows:

1. PI > 1: the proposal is accepted.

2. PI< 1: the proposal is rejected
3. PI = 0: Indifference.
Tools and Techniques of Capital Expenditure Control

The tools & techniques of capital expenditure control are describes as follows:

Tools & Techniques of Capital

Expenditure Control

Performance Index

Technical Performance
Measurement

Post Completion Audit

Performance Index
The performance index is the ratio of measured energy from a PV system to the predicted
energy using a PV performance model. Unlike with the performance ratio, the performance
index very close to 1 for a well functioning PV system and should not vary by season due to
temperature variations.

There are several formal definitions of performance indices. They are discussed in detail in
PV Performance Assessment, from Sun Spec and San José University.

 Energy Performance Index (EPI) – this form uses energy (kWh) amounts in each of
the time intervals being considered.
 Power Performance Index (PPI) – this for uses instantaneous power (kW)
measurements and predictions for the assessment and is reported as a time series.
Technical Performance Measurement
Technical Performance Measurement (TPM), as defined in one industry standard (EIA-632),
involves a technique of predicting the future value of a key technical performance parameter
of the higher-level end product under development, based on current assessments of products
lower in the system structure.

Technical Performance Measurement TPM is an analysis and control technique that is used
to:

1. Project the probable performance of a selected technical parameter over a

period of time.
2. Record the actual performance observed of the selected parameter and
3. Through comparison of actual versus projected performance, assist the
manager in decision-making.

Characteristics of TPM

1. It should be important and relevant.

2. TPM are relatively easy to measure.
3. Performance should be expected to improve with time.
4. TPM should be documented.
5. It should be tailored for the project.

Post Completion Audits (PCA):

Post completion audit aims to evaluate the efficiency and effectiveness of the capital
budgeting decision that the management has implemented. Post completion auditing (PCA)
of capital investments is a formal process that checks the outcomes of individual investment
projects after the initial investment is completed and the project is operational.1 PCA is one
formal control system that is a part of the company’s total management control system for
effective delivery of projects in future.

Project Control
Project controls are processes for gathering and analyzing project data to keep costs and
schedules on track. The functions of project controls include initiating, planning, monitoring
and controlling, communicating, and closing out project costs and schedule. Ultimately,
project controls are repeatable processes for measuring project status, forecasting likely
outcomes based on those measurements and then improving project performance if those
projected outcomes are unacceptable.
Types of Project Control:

Accounting System for Project Control

PERT/Cost Systems

Work Package & Cost

Account Control

Earned Value Concept

Project Control Process

Chapter 4

Performance Evaluation Parameters of Enterprises

Performance Evaluation Parameters for Banks:

1. Customer Base: This refers to the number of customers a bank serves. A larger
customer base indicates a higher level of trust and popularity among people. Banks
with a large customer base often have more opportunities to generate revenue.

2. Non-Performing Assets (NPAs): NPAs are loans or advances that borrowers have
not repaid for a certain period. It indicates the quality of a bank's loan portfolio.
Lower NPAs are desirable as they suggest that borrowers are repaying their loans on
time, minimizing the risk of defaults.

3. Deposits: Deposits are the funds customers keep in their bank accounts. A higher
deposit base indicates that more people trust the bank with their money. Banks use
these deposits to lend money and earn interest, which contributes to their profitability.

4. Return on Investment (ROI): ROI measures how effectively a bank utilizes its
resources to generate profits. A higher ROI indicates that the bank is efficiently
managing its assets and investments to generate returns for its shareholders.
 5. Financial Inclusion: Financial inclusion refers to providing access to financial
services to individuals who are underserved or unbanked. Banks are evaluated on
their efforts to reach out to underprivileged sections of society and provide them with
banking services, such as opening accounts and facilitating transactions.

6. Spread: Spread refers to the difference between the interest earned on loans and the
interest paid on deposits. A higher spread indicates that a bank is earning more
interest income than it is paying out, which contributes to its profitability.

7. Credit Appraisal: Credit appraisal is the process of evaluating the creditworthiness

of borrowers before approving loans. Banks need to assess the ability of borrowers to
repay their loans and determine the risk involved. A robust credit appraisal process
helps banks mitigate the risk of default and maintain a healthy loan portfolio.

8. Investments: Banks often invest in various financial instruments to earn additional

income. The evaluation of investment performance assesses how well the bank's investments
are performing and whether they are generating satisfactory returns.

Performance Evaluation Parameters for Retail:

1. ABC Analysis: ABC Analysis categorizes products into three groups based on their
sales volume and contribution to overall revenue. Group A represents high-value
products with high sales, Group B includes moderately valuable products, and Group
C comprises low-value products with lower sales. This analysis helps retailers
prioritize their inventory management and focus on high-value items.

2. Sell Through Analysis: Sell Through Analysis measures the rate at which products are
sold within a specific period. It calculates the percentage of inventory that has been
sold compared to the initial stock. This analysis helps retailers identify slow-moving
products and take necessary actions, such as markdowns or promotions, to improve
sales.

3. Multiple Attribute Method: The Multiple Attribute Method evaluates products or

suppliers based on multiple criteria, such as price, quality, delivery time, and
customer satisfaction. Each attribute is assigned a weight, and scores are assigned to
each product or supplier accordingly. This method helps retailers make informed
decisions when selecting products or suppliers.

4. GMROI (Gross Margin Return on Investment): GMROI assesses the profitability of

inventory investments. It calculates the ratio between the gross margin generated by
the products and the average value of the inventory invested. A higher GMROI
indicates that the retailer is generating more profit from its inventory investments.
This metric helps retailers optimize their inventory assortment and pricing strategies.
Difference between Current Account and Saving Account

Current Account Savings Account

Earn Interest on your

Interest No Interest earned savings

No. of Limited number of

Transactions Unlimited transactions transactions

Purpose Used for business Build emergency funds

Required High minimum required Balance Low minimum required

Balance balance

Normally used Used for paying bills and Used for salary
for business transactions accounts

Suitable for Business People Individuals

Financial Inclusion:

Financial inclusion refers to efforts to make financial products and services accessible and
affordable to all individuals and businesses, regardless of their personal net worth or
company size. Financial inclusion strives to remove the barriers that exclude people from
participating in the financial sector and using these services to improve their lives. It is also
called inclusive finance.

Process of Financial Inclusion:

1. Providing access to financial products and services.

2. Availability of financial products and services in a fair equitable manner.
3. Credit counseling which includes providing sound services to arrest deterioration of
incomes, re-structuring of debt solution to overcome debt burden, and improve
money- management skills.
Bank Spread Management:

The spread of management refers to the evolution and growth of management practices and
techniques in organizations over time and across different regions. The spread of
management began during the Industrial Revolution in the late 18th century when businesses
became larger and more complex. As companies grew in size, they needed more effective
ways to manage operations, finances, and employees.

Classes of Products for Spread Management

Credit Appraisal:

The credit appraisal process is a comprehensive evaluation conducted by financial institutions

to assess the creditworthiness of borrowers. It involves gathering and analysing the
applicant's financial data, credit history, and collateral value.

Types of Credit

Types of Credit
Service Credit

Loans

Installment Credit

Credit Cards
Performance Evaluation Parameters for Non-Profit:

1. Features of Non-Profit Organizations: Non-profit organizations have specific

characteristics that set them apart from for-profit entities. These features include a mission-
driven focus, reliance on public support and donations, volunteer involvement, and a
commitment to serving the community or a specific cause. Evaluating how well an
organization upholds these features helps assess its alignment with its intended purpose.

2. Fund Accounting: Fund accounting is a specialized accounting system used by non-

profit organizations to track and report financial activities for different funds or projects. It
ensures that resources are allocated and spent appropriately, providing transparency and
accountability in financial management. Evaluating the organization's fund accounting
practices ensures proper stewardship of resources and compliance with financial regulations.

3. Governance: Governance refers to the structures and processes through which a non-
profit organization is governed and managed. Evaluating governance involves assessing the
effectiveness of the board of directors, their expertise and diversity, decision-making
processes, and adherence to ethical standards. Strong governance ensures responsible
decision-making and enhances organizational integrity.

4. Product Pricing: Non-profit organizations often provide goods or services to support

their mission. Evaluating product pricing involves assessing whether the prices set for these
offerings are fair, affordable, and in line with the organization's social objectives. It ensures
that services are accessible to the target beneficiaries and that the organization maintains
financial sustainability.

5. Strategic Planning and Budget Preparation: Strategic planning involves setting

goals, defining strategies, and outlining action plans to achieve the organization's mission.
Evaluating strategic planning assesses the clarity, relevance, and feasibility of the
organization's plans. Budget preparation evaluates how effectively resources are allocated
and utilized to support the strategic goals. It ensures that financial resources are aligned with
the organization's priorities.

Social Audit: Social audit involves assessing the social impact and outcomes of a non-profit
organization's activities. It examines whether the organization is effectively fulfilling its
mission and making a positive difference in society. Social audit evaluates program
effectiveness, beneficiary satisfaction, and the extent to which the organization contributes to
social change.
Unit – 5

Performance Evauation Parameters for E-commerce and Audit Measurement Tool

Performance Evaluation Parameters for E-Commerce:

To effectively evaluate e-commerce performance, start with a thorough analysis of key

performance indicators (KPIs). These metrics can include conversion rates, average order
value, and shopping cart abandonment rates. By tracking these over time, you can identify
trends and pinpoint areas that need attention.

Types of E-commerce

 Business-to-Consumer (B2C): This is likely the most familiar form of e-commerce.

B2C businesses sell directly to individual consumers through platforms like Amazon,
Etsy, or their own online stores. Think of your favorite online clothing store or
electronics retailer; those fall under the B2C model.

 Business-to-Business (B2B): This involves transactions between businesses. B2B

companies often sell wholesale products or provide services to other businesses that
might use them to create their own products or support their operations. A software-
as-a-service (SaaS) company offering project management tools to other businesses
would be a B2B example.

 Consumer-to-Consumer (C2C): Online marketplaces and platforms like eBay and

Facebook Marketplace facilitate transactions between individual consumers. This
model empowers individuals to sell pre-owned goods and handmade crafts or offer
services directly to other consumers.

 Consumer-to-Business (C2B): A less common but growing model, C2B e-commerce

involves consumers selling products or services to businesses. Freelancing platforms,
where individuals offer their skills to companies, are a prime example.

Benefits of E-commerce

 Global Reach and 24/7 Accessibility: An online store breaks down geographical
barriers, allowing you to sell products or services to customers around the world at
any time of day. This significantly expands your potential customer base and enables
you to operate outside the limitations of traditional business hours.

 Reduced Operational Costs: Compared to running a physical storefront, e-

commerce often translates to lower overhead costs. You save on expenses associated
with rent, utilities, staffing, and inventory storage. This frees up resources to invest in
other aspects of your business or pass on savings to customers.
  Data-Driven Insights and Personalization: E-commerce platforms provide rich
analytics on customer behavior, sales trends, and website traffic. These insights help
you understand your target audience, tailor product offerings, personalize the
shopping experience, and make data-driven decisions to optimize your marketing and
sales strategies.

 Scalability and Flexibility: E-commerce businesses can easily scale up or down

their operations to meet demand, often with minimal additional investment. You can
quickly add new products, test different pricing models, and experiment with
promotional campaigns without the rigid constraints of a physical store.

Popular E-commerce Platforms

 WordPress with WooCommerce: A flexible, open-source platform offering vast

customization potential and a large community for support.

 Shopify: A user-friendly hosted platform popular for its ease of setup and all-in-one
features.

 BigCommerce: A scalable hosted platform known for its robust built-in features and
extensive app store.

 Magento (Adobe Commerce): An enterprise-level platform for large businesses

requiring complex setups and maximum control.

Business metrics: Business metrics are standardized quantitative measurements used to

track, assess, and analyze specific data, performance, or conditions in various fields and
industries. They provide critical insights and help stakeholders make informed decisions
based on tangible evidence.

The business metrics you track will depend on your company and your areas of focus. Check
out the performance metrics for industry verticals and departments below to get started.

1. Finance Metrics

2. Marketing Metrics

3. Sales Metrics

4. SaaS Metrics

5. Social Media Metrics

6. SEO Metrics

7. Email Marketing Metrics

8. HR Metrics
 9. Bonus Business Metrics

KPI used by E-Commerce Industry:

Ecommerce KPIs are the critical indicators that reveal the performance of your online
business against your set goals and objectives. They provide you with insights that drive your
strategic decisions.

By tracking the right eCommerce KPIs, you empower yourself to make informed decisions
that can significantly enhance conversions, revenue, marketing effectiveness, customer
satisfaction, and overall operational efficiency.

Audit Function as a performance measurement tool.

Financial Audit:

Financial Audit deals with determining whether an entity‘s financial statements and information
is properly prepared, complete in all respects and is presented with adequate disclosures in
accordance with the prescribed financial reporting and regulatory framework; and, is
accomplished by obtaining sufficient and appropriate evidence to enable the auditor to express an
opinion as to whether the financial statements and information represents a true and fair view of
the entity‘s financial situation and is free from material misstatement due to fraud or error.

Objectives of Financial Auditing

A primary objective is to reduce or eliminate problems and to promote successful personal
development. This method retains one primary objective and treats the remaining objectives
as constraints.

A secondary objective is to establish a baseline cost for interventions aimed at reducing the
level of hearing impairment. A secondary objective was to undertake a preliminary
examination of the factors that were perceived to influence the use of the technologies.

Specific objectives are detailed objectives that describe what will be researched during the
study, whereas the general objective is a much broader statement about what the study aims
to achieve overall.

Internal Audit:

Internal auditing is an independent assessment function within a company that helps

improve its operations. Internal auditors review a company’s internal controls,
governance, and risk management processes to identify areas for improvement and
ensure they are functioning effectively. This can involve examining financial records,
operational procedures, and compliance with regulations. Overall, internal auditing aims to
add value to the organization by identifying weaknesses, recommending improvements, and
promoting operational efficiency.

Objectives of Internal Audit

The following are the primary objectives of an organisation’s internal audit.

 Proper Control: Conducting an internal audit would ensure adequate control over all
business activities, which would, in turn, result in maximum efficiency. Internal
control would determine the degree of control over work.

 Accounting System: It would evaluate the organisation’s accounting system. Internal

audits include checking the proper authority for transactions such as the purchase,
retirement, and disposal of fixed assets. They check against the results against entries
to determine the actual facts and figures.

 Asset Protection: It ensures asset protection. With the proper record of assets, an
internal auditor can examine the valuation, verification, and possession of assets
belonging to the company and confirm that the purchase or sale of assets was made
under proper authority.

 Internal Check: It can evaluate the internal check system. With the division of duties
amongst employees and when every organisation member works appropriately, an
effective internal check system would exist, and the auditor’s work would decrease.
The internal auditor must only apply test checks to complete audit duty.
  Detection of Fraud: Conducting an internal audit can detect fraud in accounting
books. Internal audits begin when the work of the accounting team is done. The
accounts team often remains alert because there is insufficient time between recording
and checking. Therefore, the detection of fraud is possible with internal audits.

 Performance Appraisal: It can check performance appraisal. It can be used as a tool

to evaluate the workings of each management function so that the organisation can
achieve the targets fixed in budgets and plans.

 Accounting Policies: It would be able to examine the accounting policies of an

organisation. An understanding of the accounting system and its procedures would be
helpful in formulating effective audit plans and procedures. The internal auditor
would be able to find weaknesses in the internal control and help fix the accounting
policies.

 Process of Internal Audit:

 Notification
 Planning
 Opening Meeting
 Fieldwork
 Communication
 Report Drafting
 Management Response
 Closing Meeting
 Report Distribution
 Follow-Up

Advantages of Internal Audit:

Make Staff Alert

Detect Errors and Frauds

Reduce Misuse of Resources

Checks Efficiency

Helps Auditor

Increases Morale
Cost Audit
A cost audit examines an entity’s cost records and other linked information, including a non-
profit entity. The primary purpose of this method is to assure stakeholders, such as
shareholders, management, and regulatory authorities. The cost information a company
reports is reliable and in compliance with relevant regulations and standards.

Objectives of Cost Audit

 Verifying the accuracy of the cost data: The cost auditor examines a company’s cost
accounts and records to ensure that the reported cost data is accurate, reliable, and free
from material misstatements.
 Enhancing cost control: It helps a company identify areas where it can improve
its cost control processes. Therefore, it results in cost savings and improved
profitability.
 Identifying inefficiencies: It helps identify areas where a company may be incurring
unnecessary costs or where it can improve its production processes to reduce costs.
 Ensuring compliance with regulations: A company complies with relevant regulations
and guidelines, such as those lay down by governmental agencies or professional
bodies.
 Improving decision making: It gives management a better understanding of the
company’s cost structure. Moreover, it helps them to make more informed decisions
about cost-related matters.
Advantages of Cost Audit:

Advantages to Management

 Management gets reliable data for its day-to-day operations like price fixing, control,
decision-making, etc.

 A proper reporting system to management will closely monitor all wastages.

 Inefficiencies in the company’s working will be brought to light to facilitate

corrective action.

 Management by exception becomes possible through allocating responsibilities to

individual

 The budgetary control and standard costing system will be greatly facilitated.

Society

 Price fixing often involves this method. Therefore, according to Audit Cost data,
consumers are protected from exploitation by fixing prices.

 Since some industries do not allow price increases without proper justification, such
as increased production costs. This will reduce inflation and maintain consumer living
standards by limiting price hikes.

Shareholder

It ensures that proper records are kept regarding purchases and utilization of materials,
expenses on wages, etc. It also ensures that the valuation of closing stocks and work in
progress is fair. Thus, companies can ensure their shareholders a fair investment return.

Government

 When the Government enters into a cost-plus contract, a cost audit helps the
government reasonably fix the contract’s price.

 It fixes the ceiling prices of essential commodities, and thus, undue profiteering is
checked.

 It enables the government to decide in favour of protecting certain industries.

Management Audit

A management audit is an independent and systematic analysis and evaluation of a

company’s overall activities and performances. It is a valuable tool used to determine the
efficiency, functions, accomplishments and achievements of the company.
The primary objective of the management audit is to identify errors in management activities
and suggest possible changes. It guides the management to manage the operations most
effectively and productively.

In other words, a management audit is involved in the evaluation and assessment of the
management system and information in the various departments or the entire company. Its
reach has been extended to review system and subsystem, authorisation, procedure,
accountability, quality of data generated, quality of personnel, etc.,

Objectives of Management Audit:

 Verify Efficiency- It aims at increasing productivity at all the levels of management

and execution of policies.

 Give the Recommendation to Increase Efficiency- The management audit marks

the incapabilities in various levels of management and provides suggestions to
enhance the efficiencies.

 Evaluates the Potential of Policies and Planning- It audits and evaluates the
policies and plannings structured by the management and judge if its appropriately
implemented.

 Increase Profit- It helps to increase the profit margin by providing solutions to

maximise the company’s resources in a valuable way.

Features of Management Audit:

1. It involves analysis and evaluation of the performance of the functions performed by

managers.
2. It involves evaluation of both policies as well as actions.
3. It ensures that business organization develops in a sound and healthy manner.
4. It is more concerned with future rather than the past and therefore it is referred to as a
forward looking concept.
5. It is a dynamic and result oriented process instead of static process.

Principles of Management Audit

1) Integrity, Objectivity and Independence :

The auditor should be straight forward, honest and sincere in his approach to his
professional work and should maintain an impartial attitude.

2) Confidentiality :
The auditor should respect the confidentiality of information acquired in the course of his
audit work.
 3) Skills and Competence :
The audit should be performed and the report should be prepared with due professional
care by persons who have adequate training, experience and competence in auditing.

4) Documentation :
The auditor should maintain documents which are important in providing evidence that
the audit was carried out in accordance with the basic principles.

5) Planning :
The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner.

6) Audit Evidence :
The auditor should obtain sufficient appropriate audit evidence to enable him to draw
reasonable conclusions there from on which he can base his opinion on the financial
information.

7) Accounting System and Internal Control :

The auditor should reasonably assure himself that the accounting system is adequate
and that all the accounting information which should be recorded has been recorded
intact.

8) Audit Conclusions and Reporting :

The auditor should review and assess the conclusions drawn from the audit evidence
and submit a report that contains a clear written opinion on the financial information of
the organisation.

Advantages of Management Audit

 Management audit attests the quality of the management in the similar way as financial
audit attests the accuracy of the records and financial statements.
 It permits more objective and complete evaluation of the total management and
operating structure.
 It enables the management to find specific problem areas where managers are unable to
come out with fruitful solutions.
 Identification of major areas needing shoring up is made possible by the management
audit.
 A check can be made on new policies and practices for both their suitability and
compliance.
 It provides adequate measure for the extent to which the current managerial controls are
effective.
 It provides mechanism for continually updating the total management and operating
structure of the firm.
 Management audit does not concentrate on individual performance.

Disadvantages of Management Audit

 Management auditor cannot understand the practical problems. So, the suggestions
provided by them is theoretical but not practical.
 Scope of management audit is vague. So, it does not help to achieve specific goal.
 Generally management gives more emphasis on maintaining books of accounts rather
than concentrating on other factors. So, it consumes time of farsighted management.

Audit Report:
Once an external auditor finishes the auditing of a company, he begins a report where
he consolidates all the findings, observations, and how he thinks the company’s
financial statements are reported; this report is called an audit report.
Essentials of Audit Report:

1 – Title: The title should be an ‘Independent Auditor’s Report.’

2 – Addressee: It should be mentioned to whom the auditor’s report is given. For example,
the case of a company auditor’s report is addressed to the company members.

3 – Management Responsibility: After Addressee, the management responsibility towards the

financial statement is to be written, which includes the responsibility of management towards
the preparation and presentation of financial statements.

4 – Auditor’s Responsibility: After management responsibility, the auditor’s responsibility is

to be written, including the responsibility to issue an unbiased opinion on the financial
statements.

5 – Opinion: Then, the auditor must write his own audit report opinion on the truth and
fairness of the financial statements specifying the basis of such opinion.

6 – Basis of Opinion: State the basis of the fact;

7 – Other Reporting Responsibility: After all the above points, if there is any other reporting
responsibility, then the same is required to be mentioned, such as Report on Other Legal and
Regulatory Requirements.

8 – Signature: Then the signature is to be done by the engagement partner of the audit firm.
They provide the required input. Below is the name of the engagement partner and the audit
firm.

9 – Place and Date: Finally, the place of signature and the date of signing are to be
mentioned.

Features of Audit Report

1. Statement of facts collected by auditor.

2. Serves as medium to convey auditor’s opinion.
3. Final product of audit.
4. Based on facts and information relating to company.
5. Essential for shareholders.
6. Report may be short or long.
7. May be clean/qualified/foul report.
8. May be in the form of letter or mere statement.
9. Duly signed by auditor and attached to balance sheet.