This chapter presents internal financial reports and traditional financial measures (. return on investment) and an expanded section on value-based management. Up-to-date material on reward systems, including performance-linked pay is also covered. | Chapter 13 Financial performance measures for investment centres and reward systems Financial measures in investment centres Summary financial measures are the performance of profit centres and investment centres Return on investment (ROI) Residual income (RI) Economic value added (EVA) Return on investment Return on investment (ROI) Used to measure the performance of an investment centre Return on investment Return on investment Invested capital The assets that the investment centre has available to generate profits Return on sales The percentage of each sales dollar that remains as profit after all the expenses are covered Investment turnover The number of sales dollars generated by every dollar of invested capital Return on investment Improving ROI Increase return on sales—increase selling price or sales revenue, or decrease expenses Increase investment turnover by increasing sales revenue or reducing invested capital Actions that are taken with the sole purpose of | Chapter 13 Financial performance measures for investment centres and reward systems Financial measures in investment centres Summary financial measures are the performance of profit centres and investment centres Return on investment (ROI) Residual income (RI) Economic value added (EVA) Return on investment Return on investment (ROI) Used to measure the performance of an investment centre Return on investment Return on investment Invested capital The assets that the investment centre has available to generate profits Return on sales The percentage of each sales dollar that remains as profit after all the expenses are covered Investment turnover The number of sales dollars generated by every dollar of invested capital Return on investment Improving ROI Increase return on sales—increase selling price or sales revenue, or decrease expenses Increase investment turnover by increasing sales revenue or reducing invested capital Actions that are taken with the sole purpose of making these ratios more favourable may have adverse effects on performance in future years Advantages of ROI Encourages managers to focus on both the profits and the assets required to generate those profits Can be used to evaluate the relative performance of investment centres Limitations of ROI Encourages managers to focus on short-term financial performance, at the expense of long-term viability and competitiveness Encourages managers to defer asset replacement Discourages managers from investing in projects which are acceptable from the organisation’s point of view, but decrease the investment centre’s ROI Minimising the behavioural problems of ROI Use ROI as one of a series of performance measures that focus on both short-term and long-term performance Consider alternative ways of measuring invested capital to minimise dysfunctional decisions Use alternative financial measures, such as residual income or economic value added Residual income Residual income = .
