Performance Management Report

This report analyzes the performance and financial management of a fictitious firm, KLM plc, focusing on strategies for achieving a competitive edge. It examines various decision-making techniques, including budgetary control, cost-volume-profit (CVP) analysis, pricing strategies, and investment appraisal. The report also explores the use of a balanced scorecard for performance monitoring and risk management strategies. Specific tools and techniques are evaluated, along with their applications and limitations within the context of KLM plc's operations. The analysis includes examples illustrating CVP analysis, budgetary control, and investment appraisal using net present value (NPV). The report concludes by summarizing the key findings and emphasizing the importance of integrated financial and operational decision-making for organizational success.

PERFORMANCE
MANAGEMENT

EXECUTIVE SUMMARY
Performance & financial management covers the management, process, and behavioral
aspects of strategy execution, and managing and monitoring performance. Financial decisions
making concepts deal with analyzing the organizational issues closely to derive efficient growth
aspects for the business unit. Present report deals with seeking effective measures to ensure
organizational performance of KLM plc (Ficticious firm) to attain competitive edge within the
market. As a management accountant of KLM production unit the financial decision are critical
and sensitive as well.
Financial decision of the firm demand strong planning and effective analysis of the
current business performance and future needs of an organization. This will help the company in
creating a wide and definite impact on the success of the company. Critical decisions regarding
budgetary control, cost analysis, profit analysis, pricing factors etc. results in developing a firm
into a competitive and strong unit.
The overall performance of the company is estimated by effective management and usage
of organizational funds and resources. The report helps in analyzing the measures associated will
analyzing the performance of the company in order to develop a competitive position within the
market. It evaluated a range of tools and techniques which the organizations adopt in order to
enhance business performance to create wide impact in the organizational operations.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Techniques to Support Decision Making.........................................................................................1
Budgetary control.............................................................................................................................1
Issues of CVP...................................................................................................................................3
Pricing..............................................................................................................................................5
Limiting factors................................................................................................................................6
Investment appraisal........................................................................................................................7
Balanced scorecard..........................................................................................................................9
RISK..............................................................................................................................................11
Performance management..............................................................................................................12
Financial performance indicators..............................................................................................12
Non-financial indicators............................................................................................................12
Divisional Performance Management.......................................................................................13
Transfer pricing.........................................................................................................................13
ILLUSTRATION INDEX
Illustration 1: CVP Analysis in given situations..............................................................................4
Illustration 2: Balance scorecard......................................................................................................9

INTRODUCTION
A business unit operates within the market by making corrective decisions at right point
of time. These measures helps an organization in creating effective measures fro growth and
development. Financial decisions making concepts deal with analyzing the organizational issues
closely to derive efficient growth aspects for the business unit. Performance & financial
management covers the management, process, and behavioral aspects of strategy execution, and
managing and monitoring performance. This measures helps the company in developing
effective objectives, goals, targets and strategies using different range of techniques, tools and
approaches.
Present report deals with seeking effective measures to ensure organizational
performance of KLM plc (Ficticious firm) to attain competitive edge within the market. As a
management accountant of KLM production unit the financial decision are critical and sensitive
as well. The risk associated with these decisions are high and significant. The report will deal
with financial issues that an organization may face to enhance its production level and various
techniques to deal with the issues as well.
Techniques to Support Decision Making
Financial decision of KLM demand strong planning and effective analysis of the current
business performance and future needs of an organization. This will help the company in
creating a wide and definite impact on the success of the company. Critical decisions regarding
budgetary control, cost analysis, profit analysis, pricing factors etc. results in developing a firm
into a competitive and strong unit. These decisions are significant for the long term growth and
success of a business firm. In order to enhance growth prospects for the company the major
decision that the organization may have to deal with are discussed hence forth.
Budgetary control
The overall performance of the company is estimated by effective management and usage
of organizational funds and resources. This method helps the company in effective monitoring
and control of funds. A budget is a financial and quantitative statement which is developed in
advance to prepare the organization for analyzing and preparing for the future and upcoming
needs and requirements. This measures helps a company in developing a long term success
within the business unit. The organization develop budgets for different periods, reasons and
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measures as well. A purchase budgets enhance procurement capability of the company, sales
budget develops income and earning prospects etc.
Budgetary control technique is a measure which is used by the business unit to compare
the estimated budget with the actual budget in order to seek the variance between the two.
Budgetary control helps in planning, coordination between departments, decision-making,
monitoring of operating results and motivation of personnel to achieve business objectives. For
the current scenario the growth of KLM operating demands a balance between the estimates and
actual budget. The given example will helps in creating a definite understanding for the same.
Particulars Actual (₤) Budget (₤) Variance
(₤)
Comments Action
Revenue 105000 100000 5000 Revenue was
more than
estimated
which is
positive
No change
in business
activities
Cost of sales 48000 50000 -2000 Cost of sales
was less than
estimates
No change
in business
activities
Administrative cost 15000 10000 5000 More that
estimated
Demands
cost control
and effective
monitoring
Staff cost 30000 20000 10000 More that
estimated
Demands
cost control
and effective
monitoring
Operative profit 12000 20000 -8000 Less that
estimated
Demands
cost control
and effective
monitoring
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The above budgetary control example represents an extract of the technique which the
company may use in order to again the specified example. This measures shows that revenue and
cost of sales are exceeding the estimating which is positive for the company as the organization
purpose is to gain enhance profitability. However the increase in administrative cost and staff
Demands cost control and effective monitoring of cost. This represents these were not and
estimates efficiently thus demands effective control to enhance organizational profit. On the
basis of the given example it is clear that budgetary control is an effective and essential tool for
the long term success of the business unit.
In the given case KLM plc will thus focus on the following:
 Effective identification of variance by comparing actual with budgeted results.
 Investigation of variance as favorable, unfavorable or controlled along with its size and
impact
 Developing feedback for the departments
 taking corrective actions as per the situations.
Issues of CVP
Cost volume profit analysis is a tool to make effective decisions regarding the operational
system of the company within the competitive market. This measures helps the business unit in
creating wide impact on analyzing the operational activities of the business. It provides a detailed
snapshot of company activity to estimate the profitability within the market. This measures is a
quantitative analysis of the organizational productivity and profitability. An organization has to
closely estimate the related cost and production capacity to estimate the profitability point.
This technique of decision making is crucial for KLM plc as this is an effective tool to
analyses short term and long term profitability of the company. It will helps the company in
estimating the sales and cost associated to analyze its profitability. This is a major tool for
planning and decision making of production capacity and cost estimation of the business. The
expansion plan of the company demands to enhance the production level and productivity as
well. CVP analysis will helps KLM in making proper decisions related to
 Cost estimation (Fixed and variable cost of the company)
 Sales estimation (Revenue generation)
 Profitability
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The given example demonstrates the application of the tool and performance of the organization.
The above example represents the comparative analysis of the organizational operations
on the basis of operative leverages within the firm. As per the example first proposal represents
that to manage the profitability in the firm the operating leverage that the company will have to
maintain will be 60%. however the second proposal reflects the ratio of variable and fixed cost
that the company will need to manage the profitability. This measure thus useful for cost
estimation of the organization.
The issues that KLM may have to face while implementing CVP analysis as a decision
making tool. This is because the tool is effective for the analyzing the profitability measures and
BEP for the company significantly for one product. However the company has wide variety of
products and services. The variable ration for every product varies in terms of product range and
production capacity. Thus individual estimation of these decision is takes by the line managers of
various products and services. Hence the process may prove to be time consuming if the
estimation varies for different individuals of the company. Moreover the process of CVP is not
considered accurate. This process works on approximate values as the cost and revenue variables
may differentiate at times. The method sis not provide the range of decision but focuses on the
definite figure or number which may not be very beneficial for the firm. Furthermore the
company will have to take extreme caution when making decisions about changes to business
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Illustration 1: CVP Analysis in given situations

operations and finance. Judgments have to be made after careful investigation and deliberation --
and not just be based solely on statistics.
Break Even Point example
It is the point at which sales is determined at which entire costs of the business can be
achieved. At this point profit is zero as the amount of sales is equal to the cost of business. At
this point company comes on the position of no profit and no loss.
Pricing
The pricing factors of the company are crucial for the growth and development of the
company. Pricing measure helps companies in creating effective impact on competitiveness and
market demands as well. The organization has to significantly analyze the pricing decisions to
develop high impact on the organizational growth and development. Pricing strategies can be
used to pursue different types of objectives, such as increasing market share, expanding profit
margin, or driving a competitor from the marketplace.
PRICE /UNIT
Revenue-variable cost= contribution
Contribution- fixed cost= Profit
(Revenue-profit)/total production units = cost per unit
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Business units adopts different pricing measures in order to create an effective impact on
the growth and development of the company. The pricing decision for KLM plc must closely
consider the cost and productivity volume. To maintain the competitiveness within the market,
the organization will focus on developing low cost of production . KLM is a production unit thus
cost controlling and monitoring will helps the company in minimizing the cost incurred for
transforming raw material into finished products. Moreover effective market analysis will helps
the company in analyzing the competitor's pricing strategies. The company thus can enhance the
pricing decisions on the competitive basis to develop a competitive edge within the market. This
will helps the firm to manage the profit margin for the company.
For example a manufacturing organization can make use of markup pricing strategy. Under
this approach the percent of profit is added in the total costs so that desired level of profits can be
attained.
Limiting factors
Attaining organizational objective of profitability and profit raising measures demands a
company to keenly observe the decisions related to limited availability of factors. From the
above analysis it is clear that the financial decisions of the company are integrated with various
business activities and processes as well. A business firm often face with the issues of limiting
factors which relates to limited availability of resources. This factor directly impact the
production capacity and demand of the company as well. The company thus need to efficiently
make the decisions regarding limiting factor issues.
The issue of limited availability of materials results in disturbing the entire and
production process. Thus the organization needs to effectively analyze factors such as market
demand for the product, investment size, market size etc to evaluate the resource allocation
decisions. This is a short term decision for the company which helps in developing high impacty
on the profitability of the firm. The following example clearly determines a similar situation for
the business unit.
Cost/Product X Y Z
Selling Price 100 69 85
Variable Cost 50 20 30
Fixed Cost 25 13 15
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Profit 25 36 40
As per the stated example the profit margin of product z is maximum however if the
demand factors are not effectively analyzed this may create adverse impact on the decision
making process of the firm thus on the basis of demand the analysis will be
Particulars/Product X Y Z
Demand 200 300 250
CP 75 33 45
Revenue 15000 9900 11250
Total profit 5000 10800 10000
Thus on the basis of the above analysis it can be clearly analyzed that product Y has
maximum profitability capacity thus resources must be contributed to meet the demand for that.
Product Z follows the list as capacity of profit making is high for that product as well and
product X must be managed with the remaining product which will helps the company in
managing the profitability of the company.
Investment appraisal
The investment is one of the most significant part of the financial decision. The
management of the company keenly analyze the business needs and market factors to evaluate
the best and most effective project for investment which could helps the firm in availing high
rate of returns. Investment appraisal is one of the most effective effective tool which helps the
business in analyzing the most viable project for investment. This helps the company in
evaluating the most profitable project for investment. The common measures adopted to carry
out this process includes: Pay back period: Viability of project checked by evaluating project which will take the
minimum time to cover the investment cost and start generating returns. Net present value method: Analyzing the capacity of the project to generate cash flow
over a period of time.
 Internal rate of return method: Helps in assessing the profitability that the project may
generate on the investment.
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KLM plc will adopt NPV method to analyze the most suitable measures for investment. This
method will helps the company in undertaking the inflation rate of return which helps in making
the method most viable and effective for the company. This factors is significant for the
company to consider because the amount of investment are normally high enough that those are
not covered back in one year. Consideration of inflation rate helps the companies in analyzing
the value of money for the project efficiently. The following example provides a clear ide about
the measures.
On the basis of given example the organization had two proposal to consider. The
inflation rate considered in the given projects was 6% which helped in analyzing the present
value of the projects efficiently. By analyzing the results of this project it can be clearly analyzed
that project A has high capacity of generating results which will help the company in making
profitable and growing. Project B will be generating low returns for the company which is not
favorable for the business unit.
Investment appraisal is thus a significant part of the decision-making process of the
company which helps the business in generating high prospects for growth and development.
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Balanced scorecard
The financial analysis of the company helps in analyzing the capacity and
competitiveness of the firm. This is one of the most effective performance tool for the company
which helps the business in developing effective results to analyze the froth and development
measures within the economy. The balance scorecard is a management tool used by executives
and managers to manage the execution of organizational activities and to monitor the results of
actions. This tool provides a summarized value of the organizational performance in this
competitive environment. The balanced scorecard measure helps the company in analyzing the
key performance indicators of the company in the basis of four major operational measures.
This measure of the company helps in linking the long term strategies of the com,any
with the shot term actions. The model analyses the four broad categories of the business
enterprise which includes financial perspective, consumer prospective, internal analysis and
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Illustration 2: Balance scorecard