Chapter 5. Performance Measurement Systems

This chapter contains the 28 most important performance measurement ratios for a CFO to use, covering asset utilization, operating performance, cash flow, liquidity, solvency, return on investment (ROI), and market performance. Each measurement description includes an overview, notes on how to derive the calculation, and how it is used in an example.

Creating a Performance Measurement System

If a CFO were in favor of using all 28 of the measurements listed in this chapter, he or she might spend a great deal of time compiling the calculations, which is not a good use of time. Instead, one should see if the accounting software currently in use can automatically calculate this information. If not, then the task should be handed off to a financial analyst to calculate on an electronic spreadsheet.

Another issue for a performance measurement system is consistency of calculations. It is a simple matter to show enhanced performance measurements simply by deleting a few elements from a calculation; to avoid this, the CFO should spend a considerable amount of time formally laying out the precise definition and calculation methodology for each performance measurement. If there is some perceived risk that the measurements will be altered even with these instructions in place, then the internal audit team should be asked to review the measurements from time to time. If there is a good reason for altering a calculation at some point in the future, then ...

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