Incorporating non-financial data into organisational decision making by pptfiles


									Incorporating non-financial data
into organisational decision
Module 3
    This material has been developed as part of the UTS
    Business School and Ernst & Young ‘Leadership & Change
    for Energy Efficiency in Accounting & Management’ project.
    The project is supported by the NSW Office of Environment &
    Heritage as part of the Energy Efficiency Training Program. For
    more information on the project, please go to:

    This presentation is for educational purposes only, and does not
    contain specific or general advice. Please seek appropriate
    advice before making any financial decisions.


► Introduction
► What is non-financial performance?
► Case Study
► Measuring non-financial performance
► Types of non-financial performance
► Evaluating non-financial performance
    ► Setting KPIs
    ► Brand/reputation impacts


Learning Objectives

At the end of this module, you will be able to:
► Understand the importance of considering non-financial
  information in decision making
► Determine key non-financial information required for
► Measure and evaluate non-financial metrics effectively
► Set effective targets and/or goals
► Understand the key risks and opportunities associated
  with setting and disclosing targets and commitments


The importance of considering non-financial information in
decision making:
► Changing business world; more complex business
  environment; greater stakeholder expectations; making
  longer-term (investment) decisions
► Externalities and the free rider principle
► Efficient markets and full costing of products and services
  > including the full costs (including environmental costs)
  associated with the production, distribution, use, and
  disposal of products and services

The life cycle costing theorem

     Raffish, N.1991, ‘How Much Does That Product Really Cost: Finding Out May Be As Easy As ABC’, Management Accounting, March, pp.51-54.

What is non-financial performance?

► Companies implementing energy efficiency opportunities
  are likely to achieve a range of non-energy financial
  benefits and, where quantifiable, these need to be
  factored into the energy efficiency opportunity analysis.

► Where such benefits cannot be quantified, they should be
  noted in the opportunity assessment so that these are
  visible to decision makers.

► Key indicators of non-financial performance – people,
  community, environment, customer, supplier

Case Study – Company ABC

► Company ABC’s property division is considering replacing
  a cooling tower at one of its properties. The engineer
  commissioned to assess the cooling tower found that
  increased heat recovery will enable the decommissioning
  of a cooling tower.

     What are the potential savings (financial and non-
      financial) that you may identify in this project?

Case Study – Company ABC (cont.)

The savings are:
► electricity (a 15 kW fan and a 37 kW pump, both
  operating at 90% of installed rating with electricity price of
► water (200m3/d at a price of $0.50/m3)
► chemicals ($7000 pa)
► maintenance ($7000 pa)
► Operating hours 6000 pa, 250 days pa

Case Study – Company ABC (cont.)

► Total savings = Energy Savings + Water Savings +
  Chemical Savings + Maintenance Savings
  ► = ((Fan [kW] + Pump [kW]) x electricity price [$] x operating hours
    [h]) + (Water flow rate [m3/d] x Water Price [$/m3] x operating
    days [days / pa]) + Chemicals [$] + Maintenance [$]

  ► = ((15 + 37) x 0.9 x 0.05 x 6000) + (200 x 0.5 x 250) + 7000 +
► = $53,040 p.a.

Measuring non-financial performance

► Numbers without dollars
► Information inputs required in the calculation of key non-
  financial metrics
  ► Energy consumption
  ► Fuel consumption

► Seek external experts where needed – e.g. Engineers
► Examples of measuring common non-financial metrics
  ► Emissions and energy consumption
  ► Employee engagement – impacts on productivity, etc.

► Using frameworks/standards

Full Costs

Easy to Measure
► Salvage Value of Surplus Assets
► Avoided or Deferred Capital Expenditure
► Productivity Improvements
► Product quality Improvements
► Greenhouse Gas Emissions Reduction

Not-so-easy to Measure
► Security of Supply
► Occupational Health and Safety
► Productivity

Salvage Value of Surplus Assets

► An energy efficiency opportunity can lead to assets
  becoming surplus to requirements. Such assets may have
  a salvage value that can be realised. This value should be
  recognised during the financial evaluation of the

► Continuing the cooling tower example.
► The decommissioned cooling tower has a salvage value
  of $10,000.
► There is a $10,000 credit to the energy efficiency project
  in the year in which the salvage value is realised in year

Avoided or Deferred Capital Expenditure

► Reduced energy consumption may create sufficient spare
  capacity in a utility or process such that there is no need to install
  extra capacity for other expanding or new loads. This value
  needs to be recognised in the evaluation of the opportunity.

► Minimisation of inappropriate air use (by installing a dedicated
  blower) means a new air compressor is not required to run a new
  packing line.

► The avoided capital cost for the air compressor of $125,000 is
  recognised as a benefit in the air blower project in the year in
  which the capital expenditure is avoided.

Productivity Improvements

► Implemented energy efficiency opportunities may lead to
  productivity improvements. On sites where energy supply
  is the capacity constraining factor, reducing energy
  consumption in one part of the operations can enable a
  capacity increment elsewhere. Such productivity
  improvement is likely to be a valuable side effect of the
  energy efficiency opportunity.

► Conversely, a production rate improvement will often lead
  to reduced energy intensity. The fixed component of
  energy use (building services, start up, shutdown) will be
  spread over a greater volume of product.

Product Quality Improvements

► Energy efficiency opportunities may lead to product
  quality improvements. This could occur where better
  control of an energy input also reduces variability in a
  production operation resulting in a more consistent product.
  Such quality improvement is likely to be a valuable side
  effect of an energy efficiency opportunity.

► An energy efficiency opportunity may result in a
  production quality decrease. This should also be
  foreseeable and detected as a cost in the evaluation

Greenhouse Gas Emissions Reduction

► Where fossil fuel generated energy is used by a company,
  reducing the fossil fuel derived energy use will lead to
  reductions in greenhouse gas emissions.

► The Clean Energy Future Package will place a price on
  carbon. This will increase the avoided cost attributable to
  energy efficiency measures.

Security of Supply
► Many businesses are heavily reliant on energy to ensure their
  business can continue to operate
► With greater demand for energy services, especially during
  peak periods, there is a risk that supply may be limited during
  these times
► Energy efficiency initiatives reduces this the risk of reliance on
  external sources of energy, e.g. Electricity

► Company ABC installed a tri-generation plant at its data centre.
  By not having to rely on electricity from the grid, it will continue
  to operate even during a black-out period

      How do you factor this reduced risk into your analysis?

Occupational Health and Safety

► Energy efficiency opportunities can also lead to improved
  working conditions and safety for employees.

► A new hot water system incorporates a water temperature
  controller(s) which enable the precise temperature to be
  set. This eliminates the need to mix hot and cold which
  provides energy savings and improved safety.

     How do you factor this reduced risk into your analysis?

Evaluating non-financial performance

► Assessing the numbers – what to look for?
► How to compare? – performing analytical procedures
► Benchmarking against peers, industry and leading

Setting KPIs

      Goals set that         Targets set to
      describes Senior         achieve the
       Management’s              Goals
        overall aim


    KPIs set to track    •   Specific
      performance        •   Measurable
                         •   Achievable
       against goal      •   Realistic
     and milestones      •   Time-related
        on the way
                         •   Utilise ‘metrics’ (such as
                             intensity) for consistency
                             between operations

Brand and reputation impact

► Getting it wrong – ‘spin’ over substance
► Companies historically looked at ‘sustainability’ as a trend,
  and capitalised on market opportunities
► Some seen as ‘green-washing’ – hiding facts in ‘spin’
    ► V8 Supercars – claims of offsetting emissions from planting
      10,000 native trees
    ► LG – claimed that four washing machine models had 4A
      efficiency ratings but these had not been tested
    ► ‘Goody’ plastic bags – claimed to be biodegradable and
      compostable but this was not the case

Thank you
Module 3

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