How do you evaluate department performance using final accounts?

1 Why use final accounts for performance evaluation?

Final accounts can provide you with valuable insights into how each department contributes to the overall success of your business. By analyzing the final accounts, you can assess how well each department manages its resources, generates income, controls costs, and maintains liquidity. You can also compare the performance of different departments over time or against industry benchmarks or internal targets. This can help you identify the strengths and weaknesses of each department, reward the high-performing ones, and provide feedback and guidance to the low-performing ones.

2 How to prepare final accounts for each department?

To prepare final accounts for each department, you need to allocate the revenues and expenses of your business to the relevant departments based on some criteria. For example, you can allocate sales revenue based on the sales volume or market share of each department, or you can allocate cost of goods sold based on the direct materials and labor used by each department. You also need to allocate the assets and liabilities of your business to the departments that use or owe them. For example, you can allocate inventory based on the physical location or ownership of each department, or you can allocate accounts payable based on the purchases or invoices of each department. You can use various methods to allocate the common or indirect costs and assets that are shared by multiple departments, such as overheads, depreciation, taxes, or fixed assets. Some of these methods are the direct method, the step-down method, the reciprocal method, or the activity-based method. You should choose the method that best reflects the causal relationship between the common costs and assets and the departments.

4 How to analyze the balance sheet of each department?

The balance sheet of each department shows the assets and liabilities of that department at a specific date. You can use the balance sheet to calculate the current ratio, the quick ratio, and the debt-to-equity ratio of each department. These ratios measure the ability of each department to pay its short-term obligations, the liquidity of its most liquid assets, and the leverage of its debt financing, respectively. You can compare these ratios across departments to see which ones are more or less solvent and financially stable. You can also compare these ratios to the previous dates or the industry standards to see if there are any changes or risks.

5 How to analyze the cash flow statement of each department?

The cash flow statement of each department shows the inflows and outflows of cash from the operating, investing, and financing activities of that department for a specific period. You can use the cash flow statement to calculate the operating cash flow margin, the free cash flow, and the cash return on assets of each department. These ratios measure the percentage of revenue that is converted into cash from operations, the amount of cash that is available for reinvestment or distribution, and the efficiency of each department in generating cash from its assets, respectively. You can compare these ratios across departments to see which ones are more or less cash-generating and cash-utilizing. You can also compare these ratios to the previous periods or the industry norms to see if there are any opportunities or challenges.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?