Performance Numbers: Aligning employee and organisational objectives
Lag Indicators: Measurements of things that have already happened and are useful for reflecting on historical performance. e.g. Return on Equity (ROE), Profitability of the individual routes that the airline runs.
Lead indicators: These forms of information can be specific and focused data points that are indicative of change in the immediate term, or on the near horizon. e.g. number of new passengers that can be reached out, average cost of miles per flying
With the help of lead and lag indicators, we can forecast future financial performance.
Can be analysed through Survey analysis, market share, frequent flyers, all being lag indicators. However, we need some leading indicators to predict the future growth. Such indicators could be number of customer complaints, average advertising expenditure per month, number of frequent flyer registrations during the month, percentage of flights that took off or landed within acceptable boundaries of the scheduled times.
is distinct from financial accounting in that it is principally concerned with helping managers make better decisions.
is concerned with the measurement and presentation of financial information in a specified format.
Performance Management and KPIs: Linking activities to vision and strategy
A Key Performance Indicator (KPI) is a quantifiable measurement that shows how well an organization, team, or individual is performing against a predetermined goal or objective.
Critical Success Factors (CSFs) are the areas of activity in which your organization must perform well in order to be successful. KPIs are the means by which these CSFs can be measured. The actions below the KPIs are the tasks and projects that you carry out in order to achieve the KPIs.
Setting SMART KPIs
Whatever the nature of your KPIs, you need to make sure that they're SMART. This stands for:
Specific: be clear about what each KPI will measure, and why it's important.
Measurable: the KPI must be measurable to a defined standard.
Achievable: you must be able to deliver on the KPI.
Relevant: your KPI must measure something that matters and improves performance.
Time-Bound: it's achievable within an agreed time frame.
When you finalize a KPI, it should fulfil all of these SMART criteria. For example, “Increase new paid sign-ups to the website by 25 percent by the end of the second quarter of the financial year.”
Ask yourself the following questions to help you to understand the context and define effective KPIs:
What is your organization's vision? What's the strategy for achieving that vision?
Which metrics will indicate that you are successfully pursuing your vision and strategy?
How many metrics should you have?
What should you use as a benchmark?
How could the metrics be cheated, and how will you guard against this?
Using KPIs: an Example
It helps you identify and understand the stakeholders in your project. Doing this before your project begins help you to be successful.
i. Identify: Individuals and groups that are affected by your project the most.
ii. Prioritise: based on interest, influence and participation in your project.
Power - Interest Grid
iii. Understand stakeholders: Build a profile for each stakeholder that answers below questions.
a. What motivates your stakeholder?
b. How does it align with their priorities?
c. How can we change negative views?
Agency Theory Perspective
A problem in determining managerial accountability that arises when delegating authority to managers.
Leading and Lagging Indicators
Managerial Vs Financial Accounting
Managerial Accounting is for Internal use, document filing is not required and GAAP (Generally Accepted Accounting Principles) not required. It is future oriented (next year budget forecasting). Reporting is more frequent and should be relevant. Reporting can be based on segment or divisions.
Financial Accounting is for external use (regulators, lenders, shareholders) and document filing is required (Income Statement, Balance Sheet etc), follow GAAP. It is past oriented (last years, last quarters reports etc). Information is objective and precise. Reports are consolidated for whole company.
Financial accounting helps with Investing and Lending decisions. It also ensures corporate governance.
Next: Management Accounting