Chapter 11

Key success variable and financial goal-setting

Key variables are indispensable for achieving goals and objectives of the responsibility centers.

Identifying the key variables or key success factors

Identifying the key variables is difficult but it is crucial to find.

 Based on the certain key factors of a business, separate responsibility designations are
assigned.
 Ex – Standards manager has control over the quality of input, process and output. Work
engineer maintains the building service, plan and equipments and so on.
 There are quite a large number of variables that determine the profitability and success of the
organization.
 so, it is important to identify a few variables that are relatively crucial for attainment of
strategy, goals and objectives.

Key factors

Internal External

Where internal can be controlled but externals can't be controlled.

External:

 Price hike of basic materials (copper and zinc).

 Excise duty/custom duty
 Changes in govt. regulations
 Monetary control by RBI etc.
Types of Key Success variables:

 Out of control of management-Macro economic variables

 Partial control of management- product quality, cost, demand variables
o Ex: Life insurance co.- principal & interest
 Automobile- quality of customer relations
 Goals and Objectives : Each responsibility centers has its own goals and objectives
derived overall organizational goals according to means-end relationship, i.e. means
to achieve and end to attain the goals.
 Decision-making ability: Success of an organization depends on the ability of its
decision-makers to process information.
 Focus: More focused on those data that seem to be important for the achievement of
the manager’s goals and objectives.

Characteristics of key variables

Characteristics of key variables – important, volatile, unpredictable, measurable, and need

prompt action.

 Its important : Success and failure depends on it.

 Volatile: change quikly, like turning of profit into loss or vice-versa.
 Need prompt action: If significant changes occurs, be ready to manage any disasater
promptly.
 Unpredictable or difficult to predict: Some unpredictable incidents can cause
problems for the business and leads to shut down.
 Measurable directly or indirectly: It can be measurable in terms of alertness.

Sources of types of key success variables:

 Industry characteristic
 Competitive strategy
 Environmental forces
 Significant problems
 Functional issues

Key variables – major areas

 Marketing variables- Sales order booking, market share, key account orders
 Production variables: Capacity utilization, raw material availability, raw material
price & quality, on-time delivery, inventory turnover
 Environment variables: government policy, social attitude
Financial goals

Financial goals are developed along organization hierarchy in functional organization

whereas in divisional it is according to the divisions or branches.

 Profit is the dominant goal of most of the firm. Hence the management control
systems are designed to measure mainly profitability.
 But the concept of profitability varies from firm to firm.
 Naturally, it varies in terms of their measures.

Measures of financial goals

 Maintain Profitability
 Based on instructions from the top executive during budget preparation

Example:

 PBT- 16-20% of gross sales

 ROI- 20-24% for operations and 25% for new projects
 EPS- 10% higher than previous year
 Dividend- 15% higher than previous year
 Retained earnings- 10-15% higher than current year

Based on divisions: (Financial goals)

1. Vertical or functional org.

 Purchase: Save 10% on procurement cost

 Production: improve the productivity by 8%
 Sales: Increase in volume by 12% and price by 8%
 HRD: reduce per capita employee cost by 5%
 2. Horizontal or divisional org.

 Mumbai Branch: profit target 50 lakhs

 Chennai Branch: profit target 30 lakhs
 Kolkata branch: profit target 70 lakhs
 Export division: profit target 80 lakhs

Sensitivity analysis or ‘what if’ analysis

 After budget prepared, sensitive analysis of key variables is usually prepared.

 Sensitive analysis is a method of systematically examining the impact of the changes
in underlying assumptions on the final results.
 Impact of the changes in underlying assumptions on the final results
 Estimation of variations of input, output and other relevant factors
 Impact of variations is measured

Example:

 Fabrication industry- price of steel

 Cable industry- Price of copper
 Battery industry- price of zinc
 Confectionery- price of Maida, sugar & fat

Why – sensitive or ‘what if’

 By bringing out the effects of each variation on the final results, ‘what if’ analysis helps
the management to take adequate care of sensitive areas.
 Sensitive analysis printouts the weak areas and draws the attention of the management
towards those factors which are more sensitive than others.
 Finally – by analysis of key variables, the management prepares a sensitivity ranking for
appropriate action in case necessity. (using software packages)

Uses of Sensitivity Analysis

 Developing Recommendations for the Decision-makers

 Feasibility testing of an optimal solution
 Identifying the sensitive variables
 Identifying critical values and break-even point where the optimal strategy changes
 Assessing the degree of risk involved in strategy or scenario
 Communication
 Allows the decision-makers to make assumptions
 Making recommendations
 Quantifying the parameters
 Developing a hypothesis for testing different scenarios
 Estimating the requirements of the input and output variables
 Understanding the relationship between input variables and the outcome