The Effectiveness and Economic Efficiency in the

International Conference “Risk in Contemporary Economy” ISSN 2067-0532 XIIIth Edition, 2012, Galati, Romania, “Dunarea de Jos” University of Galati – Faculty of Economics and Business Administration

The Effectiveness and Economic Efficiency in the Context of Performance Management at the Firm Level Mihaela-Cristina ONICA [email protected]

Gianita BLEOJU

[email protected] Dunarea de Jos University of Galati, România Considering that firm performance is incomplete without addressing associated risk to fulfill it, the main objective of this research is to underline the management contribution to the performance and risk of the analyzed enterprise. A detailed financial situation analysis, which are employing annual financial analysis procedures, underling the performance and risks influencing factors, are considering one starting point for addressing the issue. The introduced variables are insuring a whole vision of firm activity and an appropriate strategy for results significance. Keywords: performance management, firm’s risks, performance management breakeven analysis, global risk evaluation, balanced scorecard JEL Classification: G32, G33, C39

1. Introduction Performance management is a common issue addressed often in the current business environment, but the management does not recognize it like an integrated specialty used at different organizational levels, but mainly as a component of strategic, operational and individual management. An integrated approach which allows the interrelation of all performance management levels is becoming an exigency for research and current business practice, in order to enable the comprehension and employment of the performance management systems. The integration of management levels is suitable because it will permit the improvement of the organizational results and will act as a catalyst for coagulating a new academic specialty which in turn will accelerate the improvements at academic research level. A research model which can be addressed for further exploring of integrated performance management approaches at organization level can be illustrated in the figure no 1.

Figure no 1. Integrated model of performance management Source: Aurel Brudan, available at: http://www.managementulperformantei.ro/pages/integrare/introducere/integrarea-managementului-performantei-la-toatenivelurile-5.html (accessed 29th of july 2011)

409


In the last past years a key tendency was the integration of strategic and individual performance management, through the employment of some instruments like Balanced Scorecard, Performance Prism, etc. The organizational objectives are becoming reflected in individual performance and the individual variables are correlated with the organizational one’s, in a common effort to improve the responsibility of the employees in organizational strategy implementation100. 2. Main integrated instruments of performance management The firms may employ or are currently employing a large amount of performance assessment models, this diversification relying upon cultural differences, firm’s values, information technology development, but mostly due to the necessity of adaptation of the model at local context. We are describing the most common of them for further detail the most suitable and valuable. The leading firms at global level are successfully employing a set of concepts and methods of production organization in order to better competitive positioning. The decisional process and selecting methods are highly influenced by client satisfaction. The adequate methods for fulfilling the objectives through value creation are: Tableau de Bord (TB) – model relying upon financial information rectification; Balanced Scorecard (BSC) – strategy based model. “Tableau de Bord” - Dashboard is the evaluation instrument of performance used mainly in France and Europe countries, back between the WW, issued by necessity of balancing the vulnerabilities of accounting system and for correlation the rest of administrative instruments (costs and budgets) . TB is an ensemble of synthetic data which is informing about the degree of fulfillment of the key objectives, due to what it is a true instrument employed in performance management. TB evolved in time and recognized transformation due to conceptual changes of administrative instruments until current similarity with Balanced Scorecard. The final version of TB from Anglo Saxon extraction is Balanced Scorecard. The model emerged as result of a KPMG research project initiated by Robert S. Kaplan and David P.Norton, early 90’s. BSC is employed under different versions; Balanced scorecard, prospective “tableau de bord “(French version), Strategic TB (adopted by Association Française de Normalisation). BSC is based upon two principles; the multidimensional character of performance assessment through a four categories of variables system and the necessity of correlation of different variables. BSC allow the firm steering based upon four approaches: investor’s satisfaction (remuneration); client satisfaction, internal system of quality, firm capability of innovation and improvement. 3. Risk influence on firm performance Risk evaluation supposes the assessment of the risk materialization degree and the impact upon the firm’s objectives in that case101. For better emphasis of the inherent and residual risks is suitable to document on Risk register and the graphic illustration of risk level. Risk monitoring is efficiently performed through Risk register which allow the firm that risk management is implemented at all levels. In conformity with Standard no 11: “Risk management” is specified under The Risk Register Model. In Romania this model of RR is compulsory inly for public sector. The elaboration of RR responsibility is due for each department manager, followed by centralization of RR’s into General RR at firm level. Risk monitoring could be addressed through: Avoiding the risk generating activity; Identifying an opportunity to further develop the risk generating activity; Effacing or isolation the risk source; Changes in nature and magnitude of the risk degree; Alter the consequences of specific risk; Deciding upon the possibility of risk keeping and surveillance. The selection of analysis methods is dealing with the instruments of risk consequences level through level variables of the dimensions of effects at a certain moment. The level of consequences is qualitative and quantitative assessed. The selection of methods can be performed upon the following considerations-table no 1. Table no. 1 Main categories of risk analysis method Main categories

Analysis Type

Description

Simplified analysis

Qualitative

Simplified informal procedure for risk table setting through brainstorming. Scale from minim medium high, without formal analysis risk technique.

100Aurel

Brudan, (2009) Integrated performance management: Linking, Strategic,Operational and Individual Performance), disponibil la: http://www.pma.otago.ac.nz/pma-cd/papers/1090.pdf, (accesat 2 August 2011) 101Standardul 11 “Managementul riscului” din O.M.F.P nr. 946/2005 pentru aprobarea Codului controlului intern la entităţile publice şi pentru dezvoltarea sistemelor de control managerial 410

International Conference “Risk in Contemporary Economy” ISSN 2067-0532 XIIIth Edition, 2012, Galati, Romania, “Dunarea de Jos” University of Galati – Faculty of Economics and Business Administration Standard analysis

Qualitative/Quantitative

Formal analysis with identified risk analysis techniques .Risk matrix implemented for results reporting.

Model based analysis

Mainly quantitative

Risk analysis model relying upon instruments: event tree analysis and estimated risk error tree techniques

Figure no. 2 . Aven T., Risk Analysis, Assessing Uncertainties Beyond Expected Values and Probabilities, John Wiley & Sons Ltd, England, 2008, p. 78 4. Economic risk assessment Under incertitude economic environment the firms must pursue the minimization of breakeven to the level of no loses. If facing difficulties in rising of sales despite marketing strategies employed, then they are obliged to diminish fixed costs to avoid loss102. In the case of C.N.F.R. NAVROM S.A. Galaţi the fixed costs were raising annually, harbor maneuvers, cleaning, towing , maintenance, rent, insures expenses. Table no. 2 Break- even Point at S.C. C.N.F.R NAVROM S.A. Galaţi 2005 – 2010 No. 1 2 3 4 5 6 7 8

Variables Sales (CA) Variable Costs (Cv) Variable costs margin Mc (1-2) Fixed Costs (Cf) Minim sales (CA minim) Safety margin (Ms) Confidence interval (Is) Efficiency increase (Se)

2005 137.247.117 44.048.476

2006 142.139.688 52.672.753

2007 155.232.835 45.990.769

2008 199.945.306 69.112.028

2009 156.160.170 56.148.502

2010 185.905.402 78.803.620

93.198.641

89.466.935

109.242.066

130.833.278

100.011.668

107.101.782

95.579.993 140.753.967 -3.506.850 -2.49 -2.56

88.801.625 141.082.683 1.057.005 0.75 0.74

104.611.423 148.652.697 6.580.138 4.43 4.24

121.702.815 185.991.721 13.953.585 7.50 6.98

94.601.808 147.713.109 8.447.061 5.72 5.41

110.507.676 191.817.293 -5.911.891 -3.08 -3.18

250,000,000.00 200,000,000.00 150,000,000.00 100,000,000.00 50,000,000.00 -

2005 2006 2007 2008

Sales (CA)

Minim sales (CA minim)

2009 2010

Figure no. 3 Economic break even point at S.C. C.N.F.R. NAVROM S.A. GALAŢI Performing break even analysis at S.C. CNFR NAVROM S.A. Galaţi we underline the following conclusions: During 2006, 2007, 2008 and 2009, the level of activity was superior to breakeven point, in the profit zone, with superior values to critical point. The situation becomes instable , the safety zone is diminishing under 10%, which prove the incapacity of the firm to adjust to market context , the operating risk being high , due to continues decreasing starting 2009 of industrial production from which cut the demand for transportation. The lack of demand for transportation increase competition which cut tariffs and the profits accordingly. The efficiency increase fail in 2005 and 2010, when the firm touch the red zone and the economic and financial balance is altering. Table no. 3 Operating leverage costs at S.C. C.N.F.R. Navrom S.A. Galaţi No. 1 2 3 4

Variables Sales (CA) Variable Costs (Cv) Variable costs margin Mcv (12) Variable costs ratio (rcv)(2/1)

2005 137.247.117 44.048.476

2006 142.139.688 52.672.753

2007 155.232.835 45.990.769

2008 199.945.306 69.112.028

2009 156.160.170 56.148.502

2010 185.905.402 78.803.620

93.198.641

89.466.935

109.242.066

130.833.278

100.011.668

107.101.782

0.32

0.37

0.30

0.35

0.36

0.42

102Bărbuţă-Mişu,

N. „Analysis and Modelling of the Financial Performance of the Enterprises – Case study of Romania on building sector (Galati County)”, LAP Lambert Academic Publishing, Köln, Germania, 2009, p. 89 411

International Conference “Risk in Contemporary Economy” ISSN 2067-0532 XIIIth Edition, 2012, Galati, Romania, “Dunarea de Jos” University of Galati – Faculty of Economics and Business Administration 5 6 7 8

Variable costs Margin ratio (rmcv) (3/1) Operating income (Rexp) Operating leverage Operating leverage ratio (CLE)(3/6)

0.68

0.63

0.70

0.65

0.64

0.58

162.121 0

-2.983.388 30.63

5.000.996 18.93

12.196.999 2.64

8.302.347 1.67

2.288.566 -16.42

574.87

-29.99

21.84

10.73

12.05

46.80

We notice in 2008 and 2009 the operating risk is diminishing with increasing report sales/breakeven point. In 2010, operating leverage is negative, which imply higher operating risk. Avoiding operating risk is possible through sales increasing and commercial margin more accelerate then variable costs margin, and keeping constant the fixed costs. 5. Financial Risk evaluation Based upon data from table 5 we calculated financial breakeven point at S.C. CNFR NAVROM S.A. Galaţi in the period 2005 – 2010. Observing breakeven and critical sales analysis we underline the following: • During 2006 -2009 we observe total sales higher critical sales which indicates profit zone, but in 2005 and 2010 breakeven point is above total sales, which means red zone. For touch critical point, total sales must equal breakeven. • Safety margin is positive in years 2006, 2007, 2008 and 2009, which illustrate risk lack and normal development of activity, following still by a negative value in 2005 and 2010 which prove that financial risk is faced by the firm. • Regarding safety range , normally must reach 20%, but in the case of the analyzed firm , the range is diminishing annually , which impose market adjustment and competitive alignment. • Profitability index or efficiency increase illustrates the level to which sales may go down until touch breakeven. The analysis proves a diminishing value, which enable reaching the breakeven. Table no. 4 Financial break even point at S.C. C.N.F.R. NABROM S.A. 2005-2010 No. 1 2

3 4 5 6 7 8 9

Variables Sales (CA) Variable Costs (Cv) Variable costs margin Mc (1-2) Fixed Costs (Cf) Interests costs Minim sales (CA minim) Safety margin (Ms) Confidence interval (Is) Efficiency increase (Se)

2005 137.247.117 4.4048.476

2006 142.139.688 52.672.753

2007 155.232.835 45.990.769

2008 199.945.306 69.112.028

2009 156.160.170 56.148.502

2010 185.905.402 78.803.620

93.198.641

89.466.935

109.242.066

130.833.278

100.011.668

107.101.782

95.579.993 194.892 14.046.964 -3.219.847 -2.29 -2.35

88.801.625 780.776 139.842.233 2.297.455 1.64 1.62

104.611.423 2.193.081 145.536.332 9.696.503 6.66 6.25

121.702.815 2.628.194 181.975.197 17.970.109 9.88 8.99

94.601.808 2.247.645 144.203.592 11.956.578 8.29 7.66

110.507.676 2.200.032 187.998.516 -2.093.114 -1.11 -1.13

Figure no. 4 Financial break even point Table no. 5 Financial leverage ratio at S.C. C.N.F.R NAVROM S.A. Galaţi No. Variables 1 Sales (CA) 2 Operating income (Rexp) 3 Financial costs (Chfin) Operating income-Financial 4 costs (2-3) Financial leverage ratio 5 (CLF)(2/4)

2005 137.247.117 162.121 1.711.610

2006 142.139.688 -2.983.388 3.366.073

-1.549.489

-6.349.461

-4.020.113

-0.10

0.47

-1.24

412

2007 2008 155.232.835 199.945.306 5.000.996 12.196.999 9.021.109 10.119.851

2009 156.160.170 8.302.347 8.821.664

2010 185.905.402 2.288.566 9.113.492

2.077.148

-519.317

-6.824.926

5.87

-15.99

-0.34


Based upon data analyses, the financial leverage ratio is documenting different values in time. Financial risk is strong only in 2008 when financial costs are rising, in the rest of the time we observe a diminishing risk level. The nature of activity the society is exposed to diversified risks; debts, currency, interests and liquidity. 6.

Global risk assessment The assessment of total risk (economic and financial) is performing through Total leverage ratio, illustrating the risk exposure of the firm in intention of economic and financial balancing. The calculus of CLT is illustrated bellow103:

The results for S.C. C.N.F.R. NAVROM S.A. Galaţi are in the table 6: Table no. 6 Total leverage ratio at S.C. C.N.F.R NAVROM S.A. Galaţi No.

1 2 3 4

Variables Sales (CA)

Variable Costs (Cv) Variable costs margin Mcv (1-2) Operating income Rexp Operating leverage ratio CLE=Mcv/Rexp Fixed costs (Cf)

5

Rexp + Cf Operating leverage ratio CLE=(Rexp+Cf)/Rexp

6

7

Financial costs (Chfin) Rexp-Chfin Financial leverage ratio CLF=Rexp/(Rexp Chfin) Total leverage ratio CLT = CLE x CLF Total leverage ratio CLT= Mcv/(Rexp-Chfin)

2005 137.247.11 7 44.048.476

2006 142.139.68 8 52672753

-2983.388

2007 155.232.83 5 45.990.769 109.242.06 6 5.000.996

2008 199.945.30 6 69.112.028 130.833.27 8 12.196.999

2009 156.160.17 0 56148502 100.011.66 8 8.302.347

93.198.641

89.466.935

162.121

2010

574.87

-29.99

21.84

10.73

12.05

46.80

95.579.993

88.801.625

110.507.676

85.818.237

121.702.81 5 133.899.81 4

94.601.808

95.742.114

104.611.42 3 109.612.41 9

102.904.15 5

112.796.242

574.87

-29.99

21.84

10.73

12.05

46.80

1.711.610 -1.549.489

3.366.073 -6.349.461

9.021.109 -4.020.113

10.119.851 2.077.148

8.821.664 -519.317

9.113.492 -6.824.926

-0.10

0.47

-1.24

5.87

-15.99

-0.34

-60.15

-14.09

-27.17

62.99

-192.58

-15.69

-60.15

-14.09

-27.17

62.99

-192.58

-15.69

185.905.402 78.803.620 107.101.782 2.288.566

Conclusion Resuming the analysis prove the rising of economic , financial and total risk due to economic global from 2008 and 2009. The financial results from 2010 were strongly altered due to continuous shrink of industrial production, which diminish the demand of transportation accordingly. The lack of demand increased competition which cut the tariffs, which in 2010 was obvious. As a correction for cut costs, the firm pursued partial conservation and annulment. In the future the firm intention is to undertake some river transportation routes in Brazil, Columbia and Sierra Leone for better employ the excess capacity. References

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