ACCA SBR UK Syllabus E. Interpret Financial Statements For Different Stakeholders - Interpret NFPIs - Notes 2 / 12
Interpret NFPIs
The use of non-financial performance indicators are an additional tool to monitor performance in not-for-profit organisations.
For example, if the case of a secondary school, some non-financial performance indicators about the performance of the school would be:
The number of pupils taught
The number of subjects taught per pupil
How many examination papers are taken
The pass rate
The proportion of students which go on to further education
Let’s take a bus service which is non-profit seeking
In fact, its mission is to provide reliable and affordable public transport to the citizens.
It often involves operating services that would be considered uneconomic by the private sector bus companies.
Let’s have a look at some non-financial performance indicators for the public bus service:
| Non-financial performance indicator | Importance |
|---|---|
| % of buses on time | Punctuality is important to passengers |
| % of buses cancelled | Reliability is important to passengers |
| Customer rating of cleanliness of facilities | Passengers require good quality service |
| % of new customers | New customers are vital for sustained growth |
| Employee morale | Happy employees are vital for success in a service business |
In not-for-profit organisations, decisions may be taken to improve short-term performance but may have a negative impact on long-term performance.
This will have limited benefit to the organisation as it will not convey the full picture regarding the factors that will drive the achievement of objectives e.g. customer satisfaction, quality of service.
Results may be manipulated to show a better picture but the effect on stakeholders will be negative.
Let’s take an example.
The hospital tends to manipulate its results with respect to waiting times for operations.
Obviously, citizens will be disappointed and start losing trust in the organisation.
Example 1
Cowsville is a town with a population of 100,000 people.
The town council of Cowsville operates a bus service which links all parts of the town with the town centre.
The service is non-profit seeking and its mission statement is ‘to provide efficient, reliable and affordable public transport to all the citizens of Cowsville.’
Attempting to achieve this mission often involves operating services that would be considered uneconomic by private sector bus companies, due either to the small number of passengers travelling on some routes or the low fares charged.
The majority of the town council members are happy with this situation as they wish to reduce traffic congestion and air pollution on Cowsville’s roads by encouraging people to travel by bus rather than by car.
However, one member of the council has recently criticised the performance of the Cowsville bus service as compared to those operated by private sector bus companies in other towns.
She has produced the following information:
| Cowsville Bus Service Summarised Income and Expenditure Account Year ending 31 March 2016 | ||
|---|---|---|
| $’000 | $’000 | |
| Passenger fares | 1,200 | |
| Staff wages | 600 | |
| Fuel | 300 | |
| Depreciation | 280 | |
| 1,180 | ||
| Surplus | 20 |
| Summarised Balance Sheet as at 31 March 2016. | ||
|---|---|---|
| $’000 | $’000 | |
| Fixed assets (net) | 2,000 | |
| Current assets | ||
| Stock | 240 | |
| Cash | 30 | |
| 270 | ||
| Less creditors due within one year | (60) | |
| Net current assets | 210 | |
| Total assets less liabilities | 2,210 | |
| Ordinary share capital (£1 shares) | 2,000 | |
| Reserves | 210 | |
| 2,210 |
Operating Statistics for the year ended 31 March 2016
Total passengers carried = 2,400,000 passengers
Total passenger miles travelled = 4,320,000 passenger miles
Private sector bus companies Industry average ratios Year ended 31 March 2016.
Return on capital employed = 10%
Return on sales (net margin) = 30%
Asset turnover =0·33 times
Average cost per passenger mile = 37·4p
Required:
(a) Calculate the following ratios for the Cowsville bus service
(i) Return on capital employed (based upon opening investment);
(ii) Return on sales (net margin);
(iii) Asset turnover;
(iv) Average cost per passenger mile.
(b) Explain the meaning of each ratio you have calculated. Discuss the performance of the Cowsville bus service using the four ratios.
Solution:
(a) Ratios
Return on Capital employed
Operating Profit / Capital employed x 100 = 20 / 2,210 x 100 = 0.9%
Return on sales (net margin)
Operating profit / Sales x 100 = 20 / 1,200 x 100 = 1.7%Asset Turnover
Sales / Capital employed = 1,200 / 2,210 = 0.54 timesAverage cost per passenger mile
Operating cost / Passenger miles = 1,180,000 / 4,320,000 = 27.3p
Tutorial Note: the term profit is used throughout this answer; in the public sector it would normally be referred to as surplus.
(b) Meaning of each ratio
Return on Capital employed.
This ratio measures the profits earned on the long-term finance invested in the business. The Cowsville bus service is only generating an annual profit of 0.9p for every £1 invested. The equivalent figure for private bus companies is 10p.Return on sales.
This ratio measures the profitability of sales. For the Cowsville bus services 1.7p of every £1 of sales is profit. The equivalent figure for private bus companies is 30p.Asset turnover.
This ratio measures a firm’s ability to generate sales from its capital employed. The Cowsville bus service generates sale of 54p for every £1 of capital employed. The equivalent figure for private bus companies is only 33p.Average cost per passenger mile.
This measures the cost of transporting passengers per mile travelled. The Cowsville bus service incurs a cost of 27.3p per passenger mile as compared to 37.4p for private bus companies.Performance of the bus service
On first sight the Cowsville bus service appears to have performed poorly as compared to private sector bus companies.
It has a low return on capital employed, largely due to a poor return on sales.
This could be explained by the low fares charged.
On the positive side its ability to generate sales is good and its buses to be more intensively used than private sector equivalents.
However, if we take into account the objectives of the council and the mission statement of the bus service it is possible to draw a different conclusion.
Private sector companies usually seek to maximise investor wealth.
The council appears to be trying to encourage usage of public transport in an attempt to reduce traffic congestion.
To do this it charges low fares, resulting in a poor return on sales and a low return on capital employed.
However, the low fares, and willingness to operate uneconomic routes has led to a high asset turnover, implying above industry average usage of the bus service.
In turn this greater usage of the service leads to a lower cost per passenger mile as fixed costs are spread more thinly over a larger number of passenger miles.
Before drawing any firm conclusions it would be sensible to compare the performance of the Cowsville bus service with that of bus operators pursuing similar objectives.
(Tutorial Note: If we compare average fare per passenger mile we can see that the Cowsville bus service charges lower fares than the private sector.
Cowsville fare per passenger mile = passenger fares ÷ passenger miles
= £1,200,000 ÷ 4,320,000 = 27.8pPrivate sector = Average cost ÷ (1 - net margin)
= 37.4p ÷ (1 – 0.3) = 53.4pCowsville charges lower fares per passenger mile. Which may explain its higher load factor and therefore its lower cost per passenger mile)