Introduction
Performance Evaluation
Performance evaluation can be based on the study of the actual financial performance with the budgets.
Calculation of breakeven volume and some key financial ratios including Economic Value Added (EVA) will also indicate the level of performance of the entity.
Financial Performance Measures
Breakeven Volume
“Number of Units Sold at which sales revenue equals total costs” (Business Directory)
In the case of Getwell Clinic it is number of patients with which the revenue equals total cost which is 29, 565 patients
Sales 1,344,000
Less: Variable Expenses
Physician Salary 552,000
Nurses Salary 195,000
Medical Supplies 159,000
Service Bureau 28,000
Other Expenses 88,000
Total Variable Expenses 1,022,000
Contribution Margin 322,000
Per patient $ 11.50
Fixed Expenses
Administrative Salary 198,000
Rent 48,000
Service Bureau 24,000
Other Expenses 70,000
Total Fixed Expenses 340,000
Breakeven Volume = Fixed Expenses ÷ Contribution Margin per Patient = $ 340,000 ÷ $ 11.50 = 29,565 patients
Return on Investment (ROI)
“A performance measure used to evaluate the efficiency of an investment” (Investopedia)
ROI for GetWell Clinic = – 8.26%
Economic Value Added (EVA)
“Economic Value Added is a performance measurement that links directly with the intrinsic value of the business.” (Balance Sheet Walk)
EVA for GetWell Clinic = ($ 44,136)
Return on Investment
ROI = Operating Income/Total Equity
Operating income = Net Income + Depreciation
= (34,000) + 16,000 = (18,000)
ROI = (18,000)/217,800 = (8.26) %
Economic Value Added
Economic Value Added (EVA) = Net Operating Profit after Taxes – (Capital * Cost of Capital)
Cost of Capital in this case is assumed at 12% being a fair and reasonable return that can be expected from the investment.
Capital Invested = Equity = $ 217,800
EVA = (18,000) – (217,800*0.12)
= (18,000) – (26,136) = (44,136)
Comments on Financial Performance
- The Revenue has not met the budgeted level
- The variable costs have behaved mostly in the way anticipated
- There are no major changes in the fixed costs than budgeted
- Lesser number of patients than budgeted has resulted in lesser revenue and ultimate net operating loss from the clinic
- The ROI and EVA are negative because of lesser number of patients and the revenue has not met the breakeven level.
References
Balance Sheet Walk Economic Value Added | Economic Profit.
Business Directory Breakeven Volume. 2010. Web.
Investopedia Return On Investment – ROI. 2010. Web.