CHAPTER 10 ANALYZING FINANCIAL PERFORMANCE REPORTS

Introduction Financial performance reports contain measurement as a bottom line of company reports that will be essential to meet company objective according to their annual plan (budgeted). There are two scope of discussion in this chapter, first is the variance (revenue and expense) between actual and budgeted data that calculated in business unit level. Second, the reports of variances are used by senior management to evaluate business unit performance. Calculating Variances Revenue Variances Selling price variance Mix and volume variance Mix variance Volume variance Other revenue analysis Market penetration and industry volume

Expense variance Fixed cost Variable cost

Variations in Practice Time period of comparison Focus on Gross Margin Evaluation Standards External standards Limitation on standards

Full cost system Amount of detail Engineered and discretionary cost Limitations of Variance Analysis The management action

CASE 10-3 GALVOR COMPANY Case Insight Galvor Company (Family Business) was founded in 1946 by owner, and President M. Georges Latour. The company had acted as a fabricator, buying parts and assembling them into high quality, moderate-cost electric and electronic measuring and test equipment. Latour had always been personally involved in every detail of the firms operations as in most family businesses. Galvor reach the peak growth rate of sales around 2.2 million new franch in 1960 to 12 million new franch in 1971, hence the bottom line of Galvor also growing 7.85 times in the same period (1960 to 1971). However, April 1, 1974, Galvor was sold the business to Universal Electric (UE) - A large multinational organization with its European Head Quarters located in Geneva. Universal Electric (UE) acquired Galvor for $4.5 million worth of UEs stock. Mr. Latour then became the chairman of the board of Galvor and Mr. Hennessy, from the UE, was deployed as Galvors managing director. M. Barsac was also placed within Galvor Company to replace M. Chambertin as Galvors controller in April of 1974, the last but not the least is Boudry, UEs European Controller; Chief Bureaucrat of all Galvors financial reports were submitted to this person. As part of the transformation process from a small independent company to a part of Multinational Corporation (MNC), Galvor had to develop new planning and control system to comply with UE. The heart of UEs reporting and control system was an extremely comprehensive document that titled as The Business Plan. It was prepared annually by each of the operating units. The Business Plan was the primary standard for evaluating the financial performance of unit managers, and everything possible was done by UEs top management to give authority to the plan. As a result of this system there was a strong centralized oriented controller organization with a large staff and relatively large business unit controller staffs. This type of organization was needed to support the needs of business planning and reporting process. Poulet Director of Manufacturing in Geneva; use financial report to see operation and identify problem in Galvor. The business plan started with summary reports, which consists of actual data, the budget of the current year, one forecast for two and one for five years. Additionally many other figures

including the five key figures (Sales, Net Income, Total assets, Total employees and Capital expenditures) were included. The next part was financial statements and finally management actions containing major management actions, plans for the functional areas and contingency plans. Next to the long-term business plan, Galvor and all other units had to submit reports during the year. They consisted of fourteen different types, which were due on a monthly basis, including the controller's monthly operating and financial review, and on top roughly twelve additional reports which were required less often per year. Time Frame Goal Objectives of Business Plan January: Geneva sets 2 year tentative objectives January To April: Objectives negotiated May: Objectives approved by Geneva and US Headquaters June July: Galvor prepares the Business Plan August: Meetings in Geneva for the review of the Business Plan. September: Approval Of the Business Plan October: Requests for major Business Plan changes November: Budget for the following year due

First, Product line objectives development Tentative Objectives negotiated Sales, Net Income, Total Assets, Total Employees, and Capital Expenditures. Second, Objectives reviewed and approved by European and U.S HQ. Third, Business Plan Developed Galvor develops year business plan and 5th year forecast. Fourth, Business Plan Approved Meetings in Geneva with European and U.S and then in November, HQ executives to approve business plan. Budget Approved Budget approved based on approved business plan. Problem statements After acquisition process there are numbers of compliance that establish by Galvor company. Staff numbers, Language barriers (French and English), Different Accounting Principles and Standards, Problems with the internal records and Lack of professional knowledge and training. All of those factors are quickly needs to response by UE Head Quarter as a parent company.

From the case insight we conclude that Galvor faces problem to create synergy and meet standard of multinational company like a UE do in their business process . There are seven problem statements that reveal in the end of case that directing the analysis in order to determine the Galvor ability to create synergy to UE as one company: 1) What is overall assessment of the effectiveness of Universal Electrics (UEs) planning system as it is applied to Galvor? 2) Identify the new management systems and techniques that UE has required Galvor to establish. In particular, trace the various steps Galvor goes through in preparing its longrange as well as annual plans. 3) Evaluate of the effectiveness of the working relationships between Hennessy and UE executives in Geneva? What do you infer from the telexes about Hennessys autonomy as a managing director? 4) Supposed Galvor were an independent company. Construct the management planning and control practices that suitable for the company differs from those imposed by UE? 5) Look at the system from UEs viewpoint. How can UEs imposing planning and control practices different from those required by an independent Galvor are justified? 6) To what extent should a large international organization (UE) rely on a comprehensive system of financial reporting and control to achieve its strategic objectives? 7) What specific changes, if any, would you make in UEs planning systems? In its other management systems? If the management processes need improving, how would you change them? Problem Analysis 1) Assessment of the effectiveness of UEs planning system as it is applied to Galvor. The case insight about the UE approach of planning system appears highly centralized organization; the management of various operating units had considerable autonomy. For Galvor Company, UE not assign any direction as a part of one company below UE Headquarter, for instance the component supplier not treated with transfer pricing (in -house) system and not treat business unit well by giving slightly incentive based performance. Universal believed that this goal of maximizing profits for the individual units would in turn maximize Universals profit. Forcing every unit to maximize profit makes they running to

reach personal goal to be profitable and not have tendency to share the competencies to other business unit in order to achieve synergy of goal congruence. UEs planning system is not effective as it is applied to Galvor. It is a very inflexible, detailed system that required too much time and too many resources for a business unit the size of Galvor. Borsac and his chief accountant spend much their time working the system. Furthermore, evidence of its ineffectiveness at Galvor includes; financial reports are not providing value to the operating business unit, Boudry stated that the cost of the system is hardly acceptable for a business unit the size of Galvor, even though Galvor is experiencing problems with the system. According to Boudry, headquarters has not given Galvor the help it needs and deserves in data processing. 2) New management systems and techniques that UE has required Galvor to establish for long run annual plan. The lists of factors below are the guidance about how the New Management Systems and Techniques that required establishing by Galvor in order to shifting their business process that suitable for UEs as their parents company. Management aspect Implement standard cost system and revise the price. Cut low margin line of product. Standardize and simplify product design. Create forward R&D development plan. Implement Product Planning. Control Aspect Better distribute tasks. Make more intensive use IBM tools. Replace non qualified with trained and dynamic people.

Recommendation action plan (short term objective): a. Converting from simple to Centralized System structure. b. Planning and controlling System. c. GALVOR need to change and adopt itself to the current parent company. d. Experts for the new subsidiary. e. Uniform reporting and controlling system. f. Informal way of Communication. 3) Effectiveness of working relationships between Hennessy & UE executive in Geneva. Telex exchanges from HQ staff to Hennessy provide no value to the operating unit. It only points out the variances, which are already obvious, and asks for additional reporting. No causalities are established. The working relationship between Hennessy and UE executives in Geneva are not doing well enough. Poulet corresponds with Hennessy via telex when problems are identified. Poulet is requested very detailed information to Hennessy regarding inventories and sales levels compared to the budget. Hennessy argue many of the variances on three policy changes that appear to be driven by the corporate headquarters. Hennessy is just going through their leadership style in Galvor and believes he is being over controlled; he is just doing the best to lift up Galvor Company. The thing that makes the relationship worsens between Geneva (Poulet) and Hennessy is the communication process that only according to their report correspondence via telexs and the conversation seems to be directing in order to gain sales not helpful or give solution to problem that appear in Galvor Company.