Financial information is needed to help the company's manager to analyze company performance and make decisions. Therefore, various type of financial measure will be adopted by company to help them measure up their company performance. Oriental Steel Pipe Sdn Bhd (OSP) has used several methods to measure their company's performance, which are Key Performance Indicators (KPIs), gross profit, net profit, Earning before Interest and Tax (EBIT), Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), Return on Capital Employed (ROCE), Operating Working Capital Requirements (OWCR), Operating Free Cash Flow (OFCF), and Gearing Ratio.
KPIs is important to help OSP to define and measure progress toward organizational goals. The KPIs of OSP is sales tonnage of the steel pipe piles. As OSP is a company produce heavy gauge, large diameter, spiral steel pipe piles in lengths up to 100m, sales tonnage is the best indicator to help OSP measure the company performance. OSP has a spiral pipe forming machine with a production capacity of 60,000 ton/year (Oriental Steel Pipe, 2011).
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Next, gross profit, net profit, EBIT and EBITA are the most common component used to evaluate the performance of OSP. Gross Profit is equal to sales minus cost of goods sold. The net profit is equal to gross profit plus revenue minus expenses. EBIT is use to measure the company earning power, which equal to earning before deduction of interest and payment of tax. EBITA is one of the measures of company's operating cash flow based on company's income statement. EBITA is equal to the company's earnings before the deduction of interest expenses, taxes, depreciation and amortization.
Manager will use these four data to determine whether the company is profitable or not. Also, by analyzing these four data, manager can determine whether the sales are favorable or not, and whether there are some unfavorable expenses that will influence the company net profit. Besides, these data is used to do budgeting to serve the purpose of planning and controlling OSP profit and operations. EBITA is also used to determine whether the OSP have large amounts of fixed assets which are subject to heavy depreciation charges. EBITA is useful for OSP as the company has significant assets.
ROCE is equal to EBIT divide by capital employed. ROCE used by OSP to determine the efficiency and profitability of the capital investments.
In addition, OFCF is equal to EBITDA plus OWCR minus capital expenditure. OWCR includes the current assets required in operating process (such as account receivables, inventory and cash) minus the non-interest bearing current liabilities (such as account payables). All of these data will help OSP in assessing the budget, and the healthiness of financial status based on fair or acceptable level by banker, shareholder and market practices.
Besides, gearing ratio is used by the OSP to measure its financial leverage. The higher the degree of leverage, more risky a company is. As OSP is private limited company, their debt equity ratio is relatively high, which is 3:1, their paid up capital is small at RM10 million.
Non-financial information is needed to help manager to make decisions and manage various sources of customer value and shareholder wealth. Therefore, non-financial measurement is used by manager to measure up OSP performance. The non-financial performance indicators include Accident Loss Time, Severity Rate, Frequency Rate, Defect Rate, Yield Rate, Machine Downtime, Production Running Time, Staff Turnover, and Punctuality Rate.
Accident Lost Time is a work-related accident that results an individual or machine unable to work on a subsequent scheduled work day. Severity rate is used to measure the impact of injuries in terms of lost time or related costs such as medical expenses or costs related to reduced productivity and quality. Frequency rate is the number of accidents per million hours work. All of these non-financial performance indicators are generated base on the actual data collected.
Defect rate implies how many errors in production occur on average. It is important for OSP to control the quality of products. There are two ways to determine the defect rate in OSP, which are visual and non-visual (Ultrosonic data). Basically, 10% sampling will be used by OSP to determine the defect rate base on England Standard.
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Machine Downtime is the time when machines are not functioning or productive. Hence, minimize the Machine Downtime is crucial to reduce the losses and maximize the efficiency of production. In OSP, the machine breakdown period is recorded manually.
Staff turnover is the ratio of number of employees that had to be replaced in a given period of time. To measure the staff turnover, OSP determine the ratio of permanent leavers in the reporting period divided by the average actual no of permanent employees over the reporting period. This data is important as high turnover rate will reduce the productivity, quality and profitability of OSP.
Punctuality rate one of the crucial financial data of OSP. In OSP, all the shift change, attendance is recorded via thumb print system. All these recorded data will automatically roll to payroll system.