Arnaboldi / Azzone / Giorgino Performance Measurement and Management for Engineers

1. Auflage 2014
ISBN: 978-0-12-801920-7
Verlag: Elsevier Science & Techn.
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 184 Seiten

Performance Measurement and Management for Engineers introduces key concepts in finance, accounting, and management to project managers who have engineering backgrounds. It focuses these basic concepts on issues of measuring and managing enterprise value. Thus, after defining enterprise value, the book begins by explaining the ways and means of measurement. It then takes up financial measurement, describing and analyzing the typologies of financial indicators while illustrating their advantages and disadvantages. After focusing on measuring enterprise value, the second section takes up managing that value. Like the first, it pursues a double view: using indicators for internal control while employing them to analyze other companies. If engineering project managers possess a source of quantitative and qualitative information about business management, Performance Measurement and Management for Engineers will help them increase their contributions to the business. - Explains how main performance indicators are related to the value of the company - Reveals how to assess the financial needs of companies in relation to their financial goals and mechanisms (e.g., equity, debt, and hybrid) - Describes key information and indicators for assessing the ability of enterprises to create value across time - Indicates the profitability sources of different business units

Michela Arnaboldi is a member of the core faculty of the School of Management at Politecnico di Milano, where she is Director of the Educational Division of the School of Management. She has served as visiting professor at the Centre for Analysis of Risk and Regulation at the London School of Economics and is a member of the Institute of Public Sector Accounting Research of the University of Edinburgh.

Autoren/Hrsg.

Arnaboldi, Michela

Azzone, Giovanni

Giorgino, Marco

Inhaltsverzeichnis

1;Front Cover;1
2;Performance Measurement and Management for Engineers;4
3;Copyright Page;5
4;Contents;6
5;Acknowledgments;8
6;1 Introduction;10
6.1;1.1 What is Enterprise Value?;10
6.2;1.2 How to Manage Enterprise Value: Enlarging the Performance Measurement Toolkit;13
6.3;1.3 Why to Manage Enterprise Value: A Multistakeholder Perspective;14
6.3.1;1.3.1 Enterprise Stakeholders;15
6.3.1.1;1.3.1.1 Shareholders;15
6.3.1.2;1.3.1.2 Debtholders;17
6.3.1.3;1.3.1.3 Other Stakeholders;18
6.3.1.4;1.3.1.4 Financial Analysts;19
6.3.2;1.3.2 External Accountability;19
6.3.2.1;1.3.2.1 Disclosure;20
6.3.2.2;1.3.2.2 Corporate Governance;20
6.3.3;1.3.3 Internal Accountability;21
6.3.3.1;1.3.3.1 Decision Making and Indicators;22
6.3.3.2;1.3.3.2 Motivation;24
6.4;1.4 Concluding Remarks;27
7;2 Value-Based Management Indicators;28
7.1;2.1 Value-Based Indicators;28
7.1.1;2.1.1 Direct Measurement of Economic Value;28
7.1.1.1;2.1.1.1 Strategic Perspective;30
7.1.1.2;2.1.1.2 Financial Analysis;31
7.1.1.2.1;2.1.1.2.1 Cost of Capital;32
7.1.1.2.1.1;2.1.1.2.1.1 The Equity Cost of Capital;32
7.1.1.2.1.2;2.1.1.2.1.2 The Firm Cost of Capital;36
7.1.1.2.2;2.1.1.2.2 Net Cash Flow Estimation;37
7.1.1.2.3;2.1.1.2.3 Terminal Value and Real Options;39
7.1.1.3;2.1.1.3 Present Value Computation: Enterprise and Equity Value;43
7.1.2;2.1.2 Relative Valuation;43
7.1.2.1;2.1.2.1 Defining Comparable Companies;44
7.1.2.2;2.1.2.2 Defining Possible Multiples;44
7.1.2.2.1;2.1.2.2.1 Enterprise Value Multiples;45
7.1.2.2.2;2.1.2.2.2 Equity Multiples;46
7.1.2.3;2.1.2.3 From Multiples to Value;46
7.1.2.4;2.1.2.4 How to Adapt Relative Valuation to Estimate Terminal Value;47
7.1.3;2.1.3 VB Proxies;48
7.1.4;2.1.4 Risk Value Indicators;48
7.1.5;2.1.5 Characteristics of VB Indicators;51
8;3 Accounting-Based Measures;52
8.1;3.1 Traditional Accounting Ratios: ROE and ROI;52
8.1.1;3.1.1 ROI and Its Subcomponents;53
8.1.2;3.1.2 Operating Activity: Further Indicators;54
8.1.3;3.1.3 Characteristics of Ratio Indicators;55
8.2;3.2 Residual Income and EVA;56
9;4 Value Drivers;60
9.1;4.1 Nonfinancial Performance Indicators;60
9.1.1;4.1.1 Time Indicators;60
9.1.2;4.1.2 Quality Indicators;62
9.1.3;4.1.3 Productivity Indicators;64
9.1.4;4.1.4 Flexibility Indicators;65
9.1.5;4.1.5 Environmental and Social Responsibility Driver;66
9.2;4.2 Nonfinancial Resource State Indicators;70
9.3;4.3 Characteristics of Nonfinancial Performance and Resource Indicators;74
9.4;4.4 Risk Drivers: Key Risk Indicators;76
9.4.1;4.4.1 Characteristics of KRI Indicators;76
10;5 Scorecards;78
10.1;5.1 Balanced Scorecard;78
10.1.1;5.1.1 Choosing Indicators: Second-Generation BSC;80
10.1.2;5.1.2 Other Types of Scorecards;81
11;6 Target Setting: Budgeting and Risk Management;84
11.1;6.1 Budgeting;84
11.1.1;6.1.1 Defining Targets: Explicit and Implicit Systems;85
11.1.2;6.1.2 Integrating Targets Among Organizational Units;86
11.1.2.1;6.1.2.1 The Integrated Approach: Master Budget;86
11.1.2.1.1;6.1.2.1.1 Sales Budget;87
11.1.2.1.2;6.1.2.1.2 Production Budget and Budgeted Inventory Level;87
11.1.2.1.3;6.1.2.1.3 Cost of Sales Budget;88
11.1.2.1.4;6.1.2.1.4 Period Cost Budget;89
11.1.2.1.5;6.1.2.1.5 Capital Budget;90
11.1.2.1.6;6.1.2.1.6 Cash Budget;91
11.1.2.1.7;6.1.2.1.7 Budgeted Cash Flow Statement;91
11.1.2.1.8;6.1.2.1.8 Detailed Cash Budget;93
11.1.2.1.9;6.1.2.1.9 Budgeted Financial Statements;93
11.1.2.2;6.1.2.2 The Adaptive Approach;96
11.2;6.2 Enterprise-Wide Risk Management;96
11.2.1;6.2.1 Origin of ERM;97
11.2.2;6.2.2 ERM Framework and Components;98
11.3;6.3 Budgeting and ERM: Organizational Configurations;101
12;7 Long- and Short-Term Decision Making;104
12.1;7.1 Investment Appraisal: Long-Term Decisions;104
12.1.1;7.1.1 Net Present Value;105
12.1.2;7.1.2 Profitability Index;105
12.1.3;7.1.3 Internal Rate of Return;106
12.1.3.1;7.1.3.1 Possible Contrast Between NPV and IRR;106
12.1.4;7.1.4 Discounted Payback Time;108
12.2;7.2 Short-Term Decision Making;110
12.2.1;7.2.1 Contribution Margin Analysis;110
12.2.2;7.2.2 CVP and Breakeven Analysis;111
13;8 Performance Control for Organizational Units;114
13.1;8.1 Boundaries and Level of Analysis;114
13.2;8.2 Measuring Performances at BU Level;116
13.2.1;8.2.1 Transfer Pricing;116
13.2.1.1;8.2.1.1 TPS Based on Market;117
13.2.1.2;8.2.1.2 TPS Based on Cost;118
13.2.1.3;8.2.1.3 Negotiated TPS;120
13.2.1.4;8.2.1.4 Models for Choosing the TPS;120
13.2.2;8.2.2 Corporate Cost Allocation;122
13.3;8.3 Measuring Performances of Responsibility Centers;123
13.3.1;8.3.1 Preliminary Analysis of Activities: Activity-Based Management;124
13.3.2;8.3.2 Cost Centers;126
13.3.3;8.3.3 Expense Centers;129
13.3.4;8.3.4 Revenue Centers;131
13.4;8.4 Measuring Performance Beyond Organizational Boundaries: Supply Chain and Network Accounting;133
13.4.1;8.4.1 Accounting for Network Effects;134
13.4.2;8.4.2 Accounting for the Network as an Entity;135
13.4.2.1;8.4.2.1 Centrality;136
13.4.2.2;8.4.2.2 Density;138
13.4.2.3;8.4.2.3 Multiplexity;138
14;9 Performance Control for Projects;140
14.1;9.1 Earned Value Management;141
14.2;9.2 Synthetic Performance Indicators for Project Advancement;144
14.2.1;9.2.1 Relative Performance Indexes;144
14.2.2;9.2.2 Absolute Performance Indexes;144
14.3;9.3 Percentage of Completeness and the Calculation of the Earned Value (BCWP);146
14.4;9.4 Estimate at Completion;149
14.5;9.5 Completing Cost/Schedule Performance Indexes (TCPI/TSPI);151
15;10 Forms and Techniques for Financing;154
15.1;10.1 Markets and Financial Needs Coverage;154
15.1.1;10.1.1 How to Measure Financial Needs;155
15.1.2;10.1.2 How to Cover Financial Needs;156
15.2;10.2 Forms and Techniques for Short-Term Financing;158
15.2.1;10.2.1 Lines of Credit;158
15.2.2;10.2.2 Commercial Papers;159
15.2.3;10.2.3 Factoring;160
15.3;10.3 Forms and Techniques for Long-Term Financing;161
15.3.1;10.3.1 IPOs;161
15.3.2;10.3.2 Bonds;162
15.3.3;10.3.3 Leasing;166
15.3.4;10.3.4 Syndicated Loans;167
16;Annexure 1: Consolidated Financial Statement;170
16.1;A1.1 The Concept of a “Group”;171
16.2;A1.2 Theories of Consolidation;172
16.3;A1.3 Methods of Consolidation;173
16.3.1;A1.3.1 First Step of Consolidation;173
16.3.2;A1.3.2 Second Step of Consolidation;173
16.3.3;A1.3.3 Third Step of Consolidation;175
16.3.4;A1.3.4 Proportionate Method;175
16.3.5;A1.3.5 Line-by-Line Method (Related to Equity Theory);177
16.3.6;A1.3.6 Line-by-Line Method (Related to Parent Company Theory);178
16.3.7;A1.3.7 Equity Method;179
17;References;180

Leseproben

Chapter 1 Introduction
Large infrastructural projects, technology and product development, manufacturing reconfiguration, and cloud computing conversion are just a few examples of activities that are now carried out in enterprises with increasing frequency. These activities are usually managed by engineers from various disciplines, yet they widely impact overall financial performance, exposure, and company value. In this context, it is mandatory to have managers who are capable of measuring weak signals from operations and projects; understanding their wider financial impact considering internal and external stakeholders; and then knowing, as a consequence, the impact on the enterprise value. Keywords
present value; decision making; internal accountability; disclosure Large infrastructural projects, technology and product development, manufacturing reconfiguration, and cloud computing conversion are just a few examples of activities that are now carried out in enterprises with increasing frequency. These activities are usually managed by engineers from various disciplines, yet they widely impact overall financial performance, exposure, and company value. In this context, it is mandatory to have managers who are capable of measuring weak signals from operations and projects; understanding their wider financial impact considering internal and external stakeholders; and then knowing, as a consequence, the impact on the enterprise value. Enterprise value is the backbone of this book and the focus of this introductory chapter. In the first section, we illustrate what enterprise value is, how to measure it and, finally, how value can be managed in a coordinated but delegated manner. 1.1 What is Enterprise Value?
To address the question “What is enterprise value?” it is first useful to understand what an enterprise is.1 Instead of quoting the formal definition, we can conceptualize companies as input–output systems (Figure 1.1).
Figure 1.1 A company as an input–output system. Enterprises aim to provide outputs (products and services) to customers and to add value to employed inputs, which include human, financial, and technological resources. To simplify: Enterprises want to maximize their output against their inputs. This simple logical thinking clashes with a fundamental computational problem: There are different types of inputs (people, machines, and patents) and outputs (various products and multiple services), each of them with diverse measurement units; hence, we simply cannot list all of them. To solve this problem and analyze the enterprise capability of creating value, money is used as a reference measurement unit. Inputs and outputs can then be expressed in cash equivalents, measuring inputs in term of the cash outflows needed to get them and outputs in terms of cash inflows deriving from their sale. From an economic point of view, we can further distinguish between: • Investments (I): Investments refer to cash outflows related to the purchase of assets that a company is going to use for more than 1 year; examples of assets are machinery, patents, equity investments, and land. • Cash flows (CF): Cash flows refer to cash exchanges related to transactions that have an impact on the short-term operating cycle of the company. Some examples include cash inflows originated by the sales of products or services and cash outflows for personnel wages, material purchases, or rent. Starting from this assertion, considering a single year, the contribution of company activities to the value of a company can be expressed as net cash flow (NCF) originated for Year 0: =NCF(0)=CF(0)–I(0) However, companies are founded and then are supposed to have an infinite lifecycle; hence, to understand the overall value, the time horizon must be lengthened, considering not only the NCF originated at Year 0 but also all the NCFs that the enterprise is going to generate in future years, with an infinite (8) horizon of time (Figure 1.2).
Figure 1.2 Time horizon for enterprise value and NCF analysis. The sum of NCFs originated in different years can appear to be the simpler solution to calculate the overall value, yet this solution overlooks a crucial issue. The value of money changes over time. To test this issue yourself, think about this: Would you agree to give a company 10,000€ this year (Y0) in exchange for 10,000€ next year (Y1)? The answer would be no because you could invest your 10,000€ in other risk-free activities—such as government bonds—to obtain a greater amount of money. For example, if the annual interest rate of government bonds (the so-called risk-free rate) is 3%, by investing 10,000€ now (Year 0), you will get back 10,300€ in 1 year. To explain these calculations: (0)=10,000€[Value atY0] (1)=10,000€*0.03=10,300€[ValueprojectedatY1withtheannualrisk-freerateof3%] This future projection of cash flows is generalized with the compounding formula, where rf is the risk-free rate, n is a generic year, and FV stands for future value. (n)=V(0)×(1+rf)n[compoundingformula] Going back to our problem of summing NCFs originated in different future years (Figure 1.2), we have the opposite problem: to calculate the present value (PV) of future cash flows. In this case, we use the discounting formula that can be easily obtained by the previous one: (0)=FV(n)(1+rf)n[discountingformula] The discounting formula allows us to solve the computational problem of summing expected cash flows over different years. Using the risk-free rate and considering an infinite horizon, the present value of future NCFs can be obtained as follows: (0)=NCF1(1+rf)1+NCF2(1+rf)2+NCF3(1+rf)3+?+NCFN(1+rf)N (0)=?t=0+8NCFt(1+rf)t[presentvalueinrisk-freeconditions] The calculation of the present value using the risk-free rate does not take into account another element of business activities: Enterprises operate in uncertain conditions; hence, they are not considered by investors as risk-free activities. This uncertainty is compensated by a risk premium for shareholders, who are individuals or entities buying and owning shares of equity2 in a corporation. Considering risk from the shareholders’ perspective, the present value formulation changes by including the risk premium at the denominator in the discounting factor, which is called cost of equity capital (kE). Here, the generic term NCF is substituted by the term free cash flow to equity (FCFE) to clarify that we assume that cash flows pertain to shareholders.3 The value formulated in this perspective is called the equity value (E) and is analytically expressed by (0)=?t=0+8FCFE(t)(1+kE)t[Equitypresentvalue] Finally, it is important to consider that enterprises are financed not only by equity capital (E) but also by debt capital (D), which may be referred to two main investors: financial institutions and bondholders. In this case, we can still refer to the formulation of equity present value, but another perspective can be adopted wherein the value is calculated with reference to all capital investors (equity and debt). In particular: • Cash flows at the numerator pertain to both equity and debtholders and are called free cash flow to firm (FCFF). • The discounting rate is the weighted average cost of capital (WACC), including the required rate of return of shareholder capital (kE) and the average interest rate of debt (kD) after tax (1-t), where t is the tax rate: (t)=DD+E×kD×(1-t)+ED+E×kE The formulation using the investors’ perspective is called the enterprise value (EV) and is expressed as follows: (0)=?t=0+8FCFF(t)(1+WACC)t[Enterprisepresentvalue] 1.2 How to Manage Enterprise Value: Enlarging the Performance Measurement Toolkit
Having defined present value as a measure of a company’s objective, the next stage is to understand how to use this metric for performance management. Although present value has the advantage of being synthetic and unique, its operational use is not straightforward, as we cannot measure value in an objective way—we can only estimate it, and any estimation depends on the expectations and information of the single investor looking at the firm. The difficulty in measuring the value of a company is even worse in the present competitive environment for several reasons: • Increasing pressures for enterprise sustainable corporate behavior: Enterprises are nowadays required to show their capability to pursue not only economic but also environmental and societal sustainable behaviors (often referred to as the triple bottom line). This broadens the factors to be considered as value drivers, although their impact on NCFs is sometimes uncertain. Think, for example, of environmental damages: forecasting their impact on present value is not easy due to the interconnectedness between effects on a company’s reputation, the financial market reaction, and actual damages and costs to be sustained, but each of these can be measured and managed as drivers of V(0). • Tradeoff between...