'The measurement of performance in a not-for-profit organisation may have value for money as its focus.’
Expand on this statement, incorporating comments on economy, efficiency and effectiveness into your answer.
***************
Since profit is not available as a performance measure in a non-profit-making organisation, other performance measures need to be considered. The value for money principle should ensure that the service is provided for minimum cost, or that the maximum benefit is achieved by the users of the service for the sum of money provided to fund the service organisation.
The principles of economy, efficiency and effectiveness would all seem to be desirable under such circumstances, but can sometimes provide conflicting decisions as follows:
• economy – using the least cost option to provide a requirement
• efficiency – maximising the ratio of output to input
• effectiveness – the extent to which objectives are achieved.
By purchasing a cheap component for a system, we may achieve economy and, by producing an output at an increased level due to the reduced cost involved, we have achieved efficiency, but if the quality is poor then the effectiveness objective is not achieved.
As an example, consider a charity that aims to provide an opthalmic service to a third world country and issue glasses where necessary to the population. By issuing cheap glasses (economy), more of the population can be assisted (efficiency), but if there is a high incidence of breakage and the glasses prove to be of little or no use then effectiveness is not achieved.
Therefore, all three ‘tests’ should be considered when assessing value for money.
************
Sunday, December 25, 2011
Tuesday, October 18, 2011
Another aspect of Benchmarking
Benchmarking is a business improvement technique. There are different types of benchmarking.
The aim of benchmarking is to identify where best practice lies and then to analyse what constitutes the best operational practice so this can be implemented across the business.
*************
Methods of Benchmarking
1. Internal benchmarking is where similar operations in different parts of the company under consideration are compared with each other and also with an internally generated target.
2. External benchmarking is where the company’s results are compared to those of other companies.
*************
There are different types of external benchmarking:
**one where competitors are used as comparators and
**another where a company with similar operations (eg warehousing), which is not a direct competitor, is compared.
*************
The main advantages and disadvantages concern the availability of benchmark information and its applicability to the business.
Internal comparison between regions in a group of companies will be easy but may not yield dramatic improvements as the regions are probably already in relatively close contact. Any improvements identified from this exercise should be easily applicable as the systems will be broadly the same.
External benchmarking in this case means comparison to competitors where the possibility of radical new ideas is greater but the difficulty will lie in obtaining sufficiently detailed information to identify the best practice business process. Of course, it will be difficult to negotiate an information sharing arrangement with a competitor due to the commercially sensitive data being exchanged. However, there exist some government schemes which require subscriber companies to supply data and then provide them with anonymised industry data in return.
It would be easier to obtain information from a company which is not in direct competition with the company but which has similar functions such as purchasing and warehousing. However, there are likely to be more significant differences in the objectives and functions of the activities being compared and so it may be harder to apply the lessons from the competitor to the company’s operations.
************
The aim of benchmarking is to identify where best practice lies and then to analyse what constitutes the best operational practice so this can be implemented across the business.
*************
Methods of Benchmarking
1. Internal benchmarking is where similar operations in different parts of the company under consideration are compared with each other and also with an internally generated target.
2. External benchmarking is where the company’s results are compared to those of other companies.
*************
There are different types of external benchmarking:
**one where competitors are used as comparators and
**another where a company with similar operations (eg warehousing), which is not a direct competitor, is compared.
*************
The main advantages and disadvantages concern the availability of benchmark information and its applicability to the business.
Internal comparison between regions in a group of companies will be easy but may not yield dramatic improvements as the regions are probably already in relatively close contact. Any improvements identified from this exercise should be easily applicable as the systems will be broadly the same.
External benchmarking in this case means comparison to competitors where the possibility of radical new ideas is greater but the difficulty will lie in obtaining sufficiently detailed information to identify the best practice business process. Of course, it will be difficult to negotiate an information sharing arrangement with a competitor due to the commercially sensitive data being exchanged. However, there exist some government schemes which require subscriber companies to supply data and then provide them with anonymised industry data in return.
It would be easier to obtain information from a company which is not in direct competition with the company but which has similar functions such as purchasing and warehousing. However, there are likely to be more significant differences in the objectives and functions of the activities being compared and so it may be harder to apply the lessons from the competitor to the company’s operations.
************
Target Costing and Its Application
Target costing should be viewed as an integral part of a strategic profit management system.
The initial consideration in target costing is the determination of an estimate of the selling price for a new product which will enable a firm to capture its required share of the market. Then it is necessary to reduce this figure to reflect the firm’s desired level of profit, having regard to the rate of return required on new capital investment and working capital requirements.
The deduction of required profit from the proposed selling price will produce a target price that must be met in order to ensure that the desired rate of return is obtained.
Thus the main theme that underpins target costing can be seen to be 'what should a product cost in order to achieve the desired level of return’.
Target costing will necessitate comparison of current estimated cost levels against the target level which must be achieved if the desired levels of profitability, and hence return on investment, are to be achieved. Thus where a gap exists between the current estimated cost levels and the target cost, it is essential that this gap be closed.
Example:
The Marketing Director of Company A has estimated that sales volume amounting to 5% of the total market size can be achieved in year 1 if a selling price of £80 per unit is maintained throughout the year. The board of directors are in agreement that they wish to maintain a 5% share by volume, of the total market size in each of years 2–4.
The management of Company A should be cognisant of the fact that it is far easier to ‘design out’ cost during the pre-production phase than to ‘control out’ cost during the production phase. Thus cost reduction at this stage of a product’s life cycle is of critical significance to business success. A number of techniques may be employed in order to help in the achievement and maintenance of the desired level of target cost. Attention should be focused upon the identification of value added and non-value added activities with the aim of the elimination of the latter. The product should be developed in an atmosphere of ‘continuous improvement’. In this regard, Total Quality techniques such as the use of Quality circles may be used in attempting to find ways of achieving reductions in product cost.
Value engineering techniques can be used to evaluate necessary product features such as the quality of materials used. It is essential that a collaborative approach is used by the management of Company A and that all interested parties such as suppliers and customers are closely involved in order to engineer product enhancements at reduced cost.
**********
The initial consideration in target costing is the determination of an estimate of the selling price for a new product which will enable a firm to capture its required share of the market. Then it is necessary to reduce this figure to reflect the firm’s desired level of profit, having regard to the rate of return required on new capital investment and working capital requirements.
The deduction of required profit from the proposed selling price will produce a target price that must be met in order to ensure that the desired rate of return is obtained.
Thus the main theme that underpins target costing can be seen to be 'what should a product cost in order to achieve the desired level of return’.
Target costing will necessitate comparison of current estimated cost levels against the target level which must be achieved if the desired levels of profitability, and hence return on investment, are to be achieved. Thus where a gap exists between the current estimated cost levels and the target cost, it is essential that this gap be closed.
Example:
The Marketing Director of Company A has estimated that sales volume amounting to 5% of the total market size can be achieved in year 1 if a selling price of £80 per unit is maintained throughout the year. The board of directors are in agreement that they wish to maintain a 5% share by volume, of the total market size in each of years 2–4.
The management of Company A should be cognisant of the fact that it is far easier to ‘design out’ cost during the pre-production phase than to ‘control out’ cost during the production phase. Thus cost reduction at this stage of a product’s life cycle is of critical significance to business success. A number of techniques may be employed in order to help in the achievement and maintenance of the desired level of target cost. Attention should be focused upon the identification of value added and non-value added activities with the aim of the elimination of the latter. The product should be developed in an atmosphere of ‘continuous improvement’. In this regard, Total Quality techniques such as the use of Quality circles may be used in attempting to find ways of achieving reductions in product cost.
Value engineering techniques can be used to evaluate necessary product features such as the quality of materials used. It is essential that a collaborative approach is used by the management of Company A and that all interested parties such as suppliers and customers are closely involved in order to engineer product enhancements at reduced cost.
**********
Tuesday, September 20, 2011
Internal Control
Explanation of Internal Control
‘The process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.
Internal control consists of the following components:
(a) The control environment;
(b) The entity’s risk assessment process;
(c) The information system, including the related business processes, relevant to financial reporting, and communication;
(d) Control activities; and
(e) Monitoring of controls.’
Examples of internal controls:
• Division of duties
• Accounting
• Management
• Physical
• Supervision
• Organisation
• Authorisation, and
• Personnel
************
‘The process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.
Internal control consists of the following components:
(a) The control environment;
(b) The entity’s risk assessment process;
(c) The information system, including the related business processes, relevant to financial reporting, and communication;
(d) Control activities; and
(e) Monitoring of controls.’
Examples of internal controls:
• Division of duties
• Accounting
• Management
• Physical
• Supervision
• Organisation
• Authorisation, and
• Personnel
************
Sunday, August 21, 2011
Qualitative characteristics of information on Risk and Internal Controls needed by the Board
The information on risks and internal controls should be high quality information. This means that it enables the full information content to be conveyed to the board in a manner that is clear and has nothing in it that would make any part of it difficult to understand. Communications should be reliable, relevant and understandable. They should also be complete.
By reliable means the trustworthiness of the information: the assumption that it is ‘hard’ information, that it is correct, that it is impartial, unbiased and accurate. Even In the event of conveying bad news.
By relevant means not only that due reports should be complete and delivered promptly, but also that anything that that should be brought to the board’s attention, should be brought to the board’s attention while there is still time for them to do something about it.
Not all directors possess the technical and nautical knowledge of senior operating personnel of the company. It is therefore particularly important that information conveyed is understandable. This means that it should contain a minimum of technical terms that have obvious meaning to operating managers but may not be understandable to a non-specialist. All communication should therefore be as plain as possible within the constraints of reliability and completeness.
By complete means that all information that the directors need to know and which the operating managers have access to, should be included, regardless of
any inconvenience that it may cause to one or more colleagues.
**********
The importance for the board of directors to have all the information
The importance for the board of directors to have all the information relating to key operational internal controls and risks
1. In the first instance, the information provided enables the board to monitor the performance of the company on the crucial issues. This includes compliance, performance against targets and the effectiveness of existing controls. By being made aware of the key risks and internal control issues at the operational level, the board can work to address them in the most appropriate way.
2. The board also needs to be aware of the business impact of operational controls and risks to enable the board to make informed business decisions at the strategic level. If the board is receiving incomplete, defective or partial information then they will not be in full possession of the necessary facts to allocate resources in the most effective and efficient way possible.
3. The board has the responsibility to provide information about risks and internal controls to external audiences. Best practice reporting means that directors have to provide information to shareholders and others, about the company’s systems, controls, targets, levels of compliance and improvement measures and hence quality information are needed to achieve this.
***********
1. In the first instance, the information provided enables the board to monitor the performance of the company on the crucial issues. This includes compliance, performance against targets and the effectiveness of existing controls. By being made aware of the key risks and internal control issues at the operational level, the board can work to address them in the most appropriate way.
2. The board also needs to be aware of the business impact of operational controls and risks to enable the board to make informed business decisions at the strategic level. If the board is receiving incomplete, defective or partial information then they will not be in full possession of the necessary facts to allocate resources in the most effective and efficient way possible.
3. The board has the responsibility to provide information about risks and internal controls to external audiences. Best practice reporting means that directors have to provide information to shareholders and others, about the company’s systems, controls, targets, levels of compliance and improvement measures and hence quality information are needed to achieve this.
***********
Advantages and Disadvantages of Risk Committee made up of NEDs
The UK Combined Code, for example, allows for risk committees to be made up of either executive or non-executive members.
Advantages of non-executive membership
1. Separation and detachment from the content being discussed is more likely to bring independent scrutiny. Sensitive issues relating to one or more areas of executive oversight can be aired without vested interests being present.
2. Non-executive directors often bring specific expertise that will be more relevant to a risk problem than more operationally-minded executive directors will have. The NEDs, being from different backgrounds, are likely to bring a range of perspectives and suggested strategies which may enrich the options open to the committee when considering specific risks.
Disadvantages of non-executive membership (advantages of executive membership)
1. Direct input and relevant information would be available from executives working directly with the products, systems and procedures being discussed if they were on the committee. Non-executives are less likely to have specialist knowledge of products, systems and procedures being discussed and will therefore be less likely to be able to comment intelligently during meetings.
2. Non-executive directors will need to report their findings to the executive board. This reporting stage slows down the process, thus requiring more time before actions can be implemented, and introducing the possibility of some misunderstanding.
***********
Advantages of non-executive membership
1. Separation and detachment from the content being discussed is more likely to bring independent scrutiny. Sensitive issues relating to one or more areas of executive oversight can be aired without vested interests being present.
2. Non-executive directors often bring specific expertise that will be more relevant to a risk problem than more operationally-minded executive directors will have. The NEDs, being from different backgrounds, are likely to bring a range of perspectives and suggested strategies which may enrich the options open to the committee when considering specific risks.
Disadvantages of non-executive membership (advantages of executive membership)
1. Direct input and relevant information would be available from executives working directly with the products, systems and procedures being discussed if they were on the committee. Non-executives are less likely to have specialist knowledge of products, systems and procedures being discussed and will therefore be less likely to be able to comment intelligently during meetings.
2. Non-executive directors will need to report their findings to the executive board. This reporting stage slows down the process, thus requiring more time before actions can be implemented, and introducing the possibility of some misunderstanding.
***********
Subscribe to:
Posts (Atom)