Business

Using financial indicators to track performance

Published

5 years ago

November 26, 2019

WHEN tracking the performance of an organisation using the balanced scorecard, managers review the performance of the business from four perspectives which are innovation and learning, internal processes, customer and financial. In this article we discuss the financial perspective. Most organisations use this perceptive in tracking the performance of the business but it has some drawbacks because it uses lagging indicators which only look at the past without giving a glimpse of how the company is likely to perform into the future.

The measures used to track performance are called key performance indicators (KPIs). A KPI reflect organisational success or progress in relation to a specified goal. The main purpose of KPIs is to monitor progress towards accomplishing the strategic objectives that are typically communicated in a strategy map and included in a reporting scorecard that enables top management, the board or other stakeholders to focus on the metrics deemed most critical to the success of an organisation.

When tracking the performance of profit seeking companies the main objective is to maximise shareholder wealth. The traditional argument being that shareholders are the legal owners of a company and so their interests should be addressed first. However, this argument is now being challenged because of a number of stakeholders that have an interest in the performance of the company. Shareholders are generally concerned with current earnings, future earnings, dividend policy and the relative risk of their investment. They want to see that the business will continue to exist, is growing and being profitable.
The financial performance indicators are based on income statement or balance sheet items. They are broken down into profitability, liquidity, gearing and shareholders’ investment indicators. The critical element when developing KPIs is determining what is important or ‘key’ to the organisation.

This is why the process of developing KPIs should be part of an overall strategic management process that connects the overall mission, vision and strategy of an organisation, and its short- and long-term goals, to specific strategic business objectives and their supporting projects or initiatives.
Understanding the organisation’s value drivers and the core activities and competencies that underpin its value proposition is an important first step in this process.

As we discuss measures or KPIs to track performance towards achieving strategic goals it’s important to note that these measures are only meaningful when compared to other time periods, other companies, industry average or against the budget. The measures are meaningless on their own.

Profitability is measured by the return on capital employed (ROCE), gross profit margin and net profit margin among others. For a business to survive and grow it ought to be profitable. That means it should be making more revenue than expenses. The amount of profit can then be compared to last year’s performance to see if there is growth.
An important profitability ratio is the return on capital employed (ROCE), expressed as return on capital employed (ROCE) equals PBIT/Capital Employed. In computing this ratio profit is taken as profit on ordinary activities before interest and taxation (PBIT), and capital employed is shareholders’ capital plus long-term liabilities and debt capital.

This is the same as total assets less current liabilities. This ratio is one of the most important ratios to investors. It shows whether you are making enough profit to compensate for the risk of being in business. You need to compare this rate of return to less risky investments like treasury bonds. When evaluating the ROCE three comparisons can be made: the change in ROCE year-on-year, the ROCE being earned by other companies, the ROCE compared with current market borrowing rates. There are two factors that contribute towards a return on capital employed, namely gross profit and net profit.
The Gross Profit Margin is expressed as Gross profit/Turnover x %. A higher gross profit percentage is preferable because it means the business is covering its cost of sales. The gross profit margin therefore shows how much profit is earned on your products before considering indirect costs. One needs to establish if the gross profit margin is improving because small changes in gross margin can significantly affect profitability.

The last profitability indicator that we will discuss, although there are more, is the Net Profit Margin which is Net profit/Turnover x %. A higher Net Profit percentage is better. This ratio shows how much money you are making per every of sales. The ratio measures your ability to cover all operating costs including indirect costs.
The other category of financial indicators is the liquidity ratios.

Profitability is an important aspect of a company’s performance, however, a company can still get bankrupt due to lack of adequate liquidity. A company needs liquid assets so that it can meet its debts when they are due. Liquidity is the amount of cash a company can obtain quickly to settle its debts.
Liquid funds consist of cash, short-term investments, fixed term deposits, trade receivables and inventory.
The major measure of liquidity is the current ratio which is Current Assets/Current Liabilities. In practice, a current ratio of 2:1 is considered good but however a comfortable ratio varies between different types of businesses.

The second liquidity ratio is the quick ratio, or acid test ratio which is Current assets less inventory/Current Liabilities. This ratio should ideally be at least 1:1 for companies with a slow inventory turnover. For companies with a fast inventory turnover, a quick ratio can be less than 1 without suggesting that the company is in cash flow difficulties. An excessively high current or quick ratio may indicate a company that is over-investing in working capital, suggesting poor management of receivables or inventories by the company.

The third category of financial indicators is the gearing ratios. These ratios are concerned with how much the company owes in relation to its size and whether it is getting into heavier debt or improving its situation. The main ratio in this category is the Gearing ratio which looks at Long Term Debt/Long Term Debt plus shareholder capital.
Capital gearing is concerned with the amount of debt in a company’s long-term capital structure. Gearing ratios provide a long-term measure of liquidity. When a company is heavily in debt, and seems to be getting even more heavily into debt, banks and other would-be lenders are likely to refuse further borrowing and the company might well find itself in trouble.

The other measure of gearing is the interest cover ratio expressed as PBIT/interest. It shows whether a company is earning enough profits before interest and tax to pay its interest costs comfortably, or whether its interest costs are high in relation to the size of its profits, so that a fall in profit before interest and tax (PBIT) would then have a significant effect on profits available for ordinary shareholders. When a company is earning only a modest profit before interest and tax, and has a heavy debt burden, there will be very little profit left over for shareholders after the interest charges have been paid.

The fourth category of financial indicators is the shareholders’ investment ratios or stock market ratios. These are very important for shareholders. The first of these ratios is the earnings per share (EPS). Earnings per share is Profit after tax, extraordinary items and preference dividends divided by the number of ordinary shares that are ranking for dividends. EPS is widely used as a measure of a company’s performance and is of particular importance in comparing results over a period of several years. A company must be able to sustain its earnings in order to pay dividends and re-invest in the business so as to achieve future growth. Investors also look for growth in the EPS from one year to the next.

The other ratio is the P/E ratio or Price/earnings ratio. The P/E ratio is, simply, a measure of the relationship between the market value of a company’s shares and the earnings from those shares. The value of the P/E ratio reflects the market’s appraisal of the shares’ future prospects. In other words, if one company has a higher P/E ratio than another it is because investors either expect its earnings to increase faster than the other’s or consider that it is a less risky company or is in a more ‘secure’ industry
There are limitations to the use of financial ratios. There could be challenges in the availability of comparable information. When making comparisons with other companies in the industry, averages may hide wide variations in figures.

Figures used for comparisons are mostly historical. Comparisons with the previous history of a business may be of limited use, if the business has recently undergone, or is about to undergo, substantial changes. In addition, ratios based on published accounts suffer from the disadvantage that these accounts are filed some months after the end of the accounting period. Comparisons over time may also be distorted by inflation.

Ratios are not definitive in determining the state of a business. ‘Ideal levels’ of indicators vary industry by industry, and even they are not definitive. Companies may be able to exist without any difficulty with ratios that are rather worse than the industry average. There is need for careful interpretation of the ratios. For example, if comparing two businesses’ liquidity ratios, one business may have higher levels. This might appear to be ‘good’, but further investigation might reveal that the higher ratios are a result of higher inventory and receivable levels which are a result of poor working capital management by the business with the ‘better’ ratios.

Ratios are also subject to manipulation. Any ratio including profit may be distorted by choice of accounting policies. For smaller companies, working capital ratios may be distorted depending on whether a big customer pays, or a large supplier is paid, before or after the year-end.

l Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. He is the Managing Consultant of Shekina Consulting (Pty) Ltd. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

Business

Take a Break from Summer

Published

1 month ago

December 18, 2024

The Post

Press release for KFC Lesotho

Date: Monday, 16 December 2024

Summer, what a wonderful time of year…

When influencing gets too much

When the news cycle gets too much

When the endless queues get too much

When the shopping chaos gets too much

When the unavailable transport gets too much

When the holiday work shifts get too much

When the lawn mowing gets too much

When the loud music gets too much

When the traffic gets too much

When the relentless schedule gets too much

When the heatwaves get too much

When the weather warnings get too much

When the suntan lines get too much

When the ever-growing laundry pile gets too much

When the festivities get too much

When the 2025 university applications get too much

When the guests overstaying their welcome gets too much

When the social media mayhem gets too much

When the out of sync traffic lights get too much

When the New Year resolutions get too much

When the travel expenses get too much

When reapplying sunscreen gets too much

When the packing and unpacking gets too much

When the photo-taking gets too much

When the flies get too much

When the pool maintenance gets too much

When the fully booked airlines get too much

When the mosquito bites get too much

When the fishing trips get too much

When the baking gets too much

When the road trip stops get too much

When the sand in the car gets too much

When the picnic ants get too much

When the papa and morogo get too much

When the braai smoke gets too much

When the television shows get too much

When the homemade cooking gets too much

When the hot car seats get too much

When the outdoor markets get too much

When the air-conditioning bills get too much

When the nature hikes get too much

When the garden-watering gets too much

When the hot sidewalks get too much

When the bike rides get too much

When the late nights get too much

When the impromptu trips get too much

When the 4×4 rides get too much

When the golf games get too much

When the ice cube trays get too much

When the late-night crickets get too much

When the entertaining gets too much

When the bumpy boat rides get too much

When the paddleboarding gets too much

When the public pool crowds get too much

When the lack of parking gets too much

When the summer internships get too much

When all you need is a breather

You have made it to the end. Take a break from summer with KFC Lesotho on Saturday, 21 December, a day to pause, refresh, and savour the start of holiday mode. Swing by KFC for a taste of summer and officially step into the holidays, recharged and ready. See you there!

Discover KFC’s Summer Delights!

KFC Summer Twisters: https://www.youtube.com/watch?v=LVlAX00WROU

KFC Summer Krushers: https://www.youtube.com/watch?v=QpCn-tFYrls

KFC Summer Buckets: https://www.youtube.com/watch?v=SbiOjRR58UA

End.

About KFC Africa

KFC has been in South Africa for over 53 years and has more than 1,300 stores across the country. The first KFC restaurant in South Africa opened in 1971 in Orange Grove, Johannesburg. KFC is the leading quick-service restaurant brand in South Africa with just under a third of market share, according to Brand Image Tracker. KFC serves more than 20 million customers a month and we work hard to ensure that no matter which of our restaurants they walk into, they will get that distinctive KFC flavour and have a great experience. KFC’s Original Recipe® Chicken was first made by Colonel Harland Sanders in 1940 when he perfected his secret recipe of 11 herbs and spices at his restaurant in Kentucky. Today, KFC is the world’s most popular chicken restaurant, still preparing our chicken with the Colonel’s secret recipe to his exact standards. Every KFC restaurant follows the same global processes and procedures to ensure that our customers get great-tasting food, every time.

KFC Lesotho socials:

Instagram – @kfclesotho – https://www.instagram.com/kfclesotho/

Facebook – KFC Lesotho – https://www.facebook.com/LesothoKFC

X – @KFC_Lesotho – https://x.com/KFC_Lesotho

Business

Demystifying death benefit nomination

Published

1 month ago

December 16, 2024

The Post

I recently attended a trustee training session, and it sparked a thousand of opinions and emotions to fellow trustees and principal officers.

It is remarkable how people approach their pension funds with a blend of care and chaos — carefully watching contributions grow but leaving the aftermath of their departure to luck and a roomful of trustees.

With the Pension Fund Act (PFA) 2024 in place, requiring members to fill out and update death benefit nomination forms annually, one would think the process is foolproof.

Yet, we find ourselves navigating the maze of member reluctance and the emotional minefield that comes with deciding who gets what.

The PFA 2024 makes an elegant appeal to order, asking pension fund members to take charge of their legacy by nominating beneficiaries.

But, instead of pens gliding over forms, there is hesitation, resistance, and in some cases, outright abstinence.

What should be a simple administrative act seems to invoke existential dread or, worse, familial politics.

When Nomination Feels Like Negotiation

One of the most notable trends is the discomfort married members feel at the mere suggestion of allocating 50% of their death benefit to a spouse.

For clarity, the PFA does not say they must — but logic and love might.

However, these conversations often spiral into arguments over “what ifs.”

What if the marriage does not last?

What if the spouse uses the money “irresponsibly”?

What if leaving an equal share to children or a secret favourite nephew makes more sense?

These “what ifs” often lead to another troubling “what if”: what if no nomination is made at all?

Emotions run high.

Sometimes, the process of completing the form turns into a reflection of unresolved family tensions, where the form itself becomes a battlefield for hypothetical posthumous power plays.

Trustees, meanwhile, are left to pick up the pieces, making discretionary decisions that almost always leave someone unhappy.

What the Law Actually Says

Let us address the elephant in the room.

The PFA does not dictate that anyone’s spouse, child, or distant cousin must receive a cent.

The law requires you to nominate beneficiaries but leaves the who and how much entirely up to you.

And yet, myths persist, leaving members to believe they are bound to make obligatory allocations.

This misunderstanding is not just inconvenient; it is entirely unnecessary.

The beauty of the PFA lies in its simplicity: nominate someone — anyone — so your trustees don’t have to piece together your
wishes based on tea leaves, distant

relatives, or that one time you mentioned something in passing to a colleague.

The Real Cost of Silence

If leaving decisions to trustees sounds romantic — think noble strangers making wise decisions — let me assure you, it’s not.

Trustees do their best with the tools they have, but without a completed nomination form, their decisions are guided by discretion rather than your explicit intentions.

And discretion, noble as it sounds, often breeds disputes.

Disgruntled beneficiaries are not just an unfortunate byproduct of silence; they are its loudest consequence.

Without clear instructions, your death benefits might fund lawsuits instead of legacies.

Is that truly the financial wisdom you have cultivated over a lifetime of disciplined contributions?

Completing the Form: The Act of Taking Control

Filling out the nomination form isn’t just compliance; it is an act of empowerment.

It’s the financial equivalent of saying, “I trust myself to make the best decisions for my loved ones.”

It’s an opportunity to assert control over your life’s earnings and ensure they benefit those you deem most deserving.

Let us put it plainly: by completing this form, you eliminate guesswork, prevent disputes, and protect your loved ones from unnecessary turmoil.

You also spare trustees from playing Solomon with your assets — a responsibility they never asked for but inherit when you opt for avoidance.

It is not that deep!

For all the effort we pour into overthinking, let’s consider the alternative — actually completing the form.

You’ve already made harder decisions, like choosing between investment portfolios or deciding on your retirement age.

Writing down a name or two, alongside their allocations, is, comparatively, a walk in the park.

And for those of you abstaining because “it’s complicated,” let us reflect: is it more complicated than the potential legal battles, heartache, and chaos that might follow your departure?

Or are we simply procrastinating because planning for death feels uncomfortably final?

Your Legacy, Your Way

At the heart of it all, filling out the nomination form isn’t about complying with a law or appeasing trustees.

It is about ensuring your legacy aligns with your wishes.

It is about giving your loved ones clarity and peace of mind when they need it most.

So, grab that pen.

Fill in that form.

It might not be the most exciting thing you do today, but it could very well be the most meaningful.

After all, if you’ve spent years building a financial future, why let your final act of planning be defined by inaction?

Teboho Makoetlane

Business

More US funding for development projects

Published

2 months ago

December 2, 2024

The Post

MASERU-THOMAS Hines, the US Embassy’s interim head, has applauded Lesotho for passing the Millennium Challenge Corporation (MCC)’s scorecard, paving way for continued development funding.

The MCC is providing assistance to Lesotho to strengthen good governance, economic freedom and investments in the country, managed by the Millennium Challenge Account (MCA-Lesotho Compact II).

The MCC donated US$300 million (approximately M5.4 billion) for health and horticulture development.

For the country to qualify, it had to pass the MCC’s scorecards.

Hines told Prime Minister Sam Matekane on Tuesday at the State House that the good news is that Lesotho passed, although there are some other things the country has to improve.

For this year, the passing indicators are girls’ primary education completion rate, natural resource protection, land rights and access and fiscal policy.

Indicators that slipped below the pass rate are government effectiveness and freedom of information.

“Of MCC’s 76 scorecards, only 26 countries passed while 50 did not and the good news is that Lesotho once again passed the scorecard,” Hines said.

He said not only did Lesotho pass but it has also improved from passing 15 indicators last year to 17 of 20 indicators this year.

Hines said the accomplishment reflects Matekane and his government’s commitment to strengthening democratic governance and fostering prosperity.

“Noting the decline in control of corruption indicator, we seek avenues to do more together with Lesotho to combat corruption,” he said.

“Not only does regression in this area put Lesotho at risk of failing the scorecard we also know the corrosive impact of corruption on the economy and society.”

He said they seek to maximise the compact’s ability to ensure greater access to quality healthcare.

Matekane said the scorecards assess the government’s performance in key areas throughout the year to determine the continuing eligibility regarding MCC compact funding.

He said last year he urged the cabinet to build on the momentum from 15 out of 20 indicators.

“Let me take this opportunity to celebrate our sustained achievement of passing 17 out of 20 indicators which is a 10 percent increase from last year,” Matekane said.

“Specifically, I committed last year to ensure that Lesotho will submit data to support the assessment of girl’s primary education completion rate,” he said.

He said he was pleased with the progress overall and on gender parity in education and they aim to achieve better results next year.

In addition to this, he said, there is still a lot of work to be done, especially around trade policy, government effectiveness and particularly the freedom of information with a notable decline from 83 percent down to 43 percent.

“Our commitment to control and eliminate corruption remains steadfast. We are working tirelessly to expose corrupt activities, keeping the public sector honest and accountable,” he said.

“The commitment we have made of investing in our people has never wavered over the years and the government is also focused on improving access to quality health services to every Mosotho regardless of their background and location,” he said.

Moipone Makhoalinyane