Evaluating Operating Performance In determining whether a firm is achieving its goals and objectives, two aspects of operations are important: effectiveness and efficiency. As we said in the section on Strategic Planning in Section B, “a publicly-owned for-profit company must have maximizing shareholder value as its ultimate goal. The shareholders are the owners. They have provided risk capital with the expectation that the managers will pursue strategies that will give them a good return on their investment. Thus, managers have an obligation to invest company profits in such a way that shareholder value will be maximized.” Effectiveness and efficiency are important aspects of fulfilling that obligation. An effective operation is one that achieves or exceeds the goals set for the operation. The ultimate goal is to maximize shareholder value. Effectiveness in reaching its goals can be measured by analyzing the firm’s critical success factors. Critical success factors may be a desired level of operating income, an increase in market share, new products introduced, or a specified return on investment. The master budget states the desired operating income for the period and is a basic starting point for evaluating the effectiveness of the firm in attaining its profitability goals by comparing actual results with the planned results. An efficient operation is one that makes effective use of its resources in carrying out the operation. If the firm attained its goal of increasing sales but it spent more of its resources than necessary in attaining that goal, the firm may be effective but it is not efficient. Alternatively, a firm may be efficient in its use of resources, spending less than planned per unit sold, but if the firm’s goals for profitability and growth are not achieved because sales are too low, the firm was not effective. Therefore, assessments of efficiency are independent from assessments of effectiveness. Cost management aids in assessing both effectiveness and efficiency.
Posted on: Tue, 18 Nov 2014 06:53:37 +0000
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