Internal Management System and Key Performance Indicators
This chapter describes how the Volkswagen Group is managed and the key performance indicators used for this purpose. In addition to financial measures, our management system also contains nonfinancial key performance indicators.
The Volkswagen Group’s performance and success are expressed in both financial and nonfinancial key performance indicators.
In the following, we first describe the internal management process and then explain the Volkswagen Group’s most significant performance indicators, known as the core performance indicators.
INTERNAL MANAGEMENT PROCESS IN THE VOLKSWAGEN GROUP
Consistent, close integration of the Group and brand strategies with the operational planning process ensures transparency at the Volkswagen Group when it comes to the financial assessment and evaluation of strategic decisions. The operational medium-term planning that is conducted once a year and generally covers a period of five years is incorporated into the strategic planning as a key management element of the Group.
Medium-term planning forms the core of our operational planning and is used to formulate and safeguard the requirements for realizing strategic projects designed to meet Group targets in both technical and economic terms – and particularly in relation to earnings, cash flow and liquidity effects. In addition, this planning also serves as a basis to coordinate all business areas with respect to the strategic action areas concerned, namely functions/processes, products and markets.
When planning the Company’s future, the individual planning components are determined on the basis of the timescale involved:
- The long-term unit sales plan, which sets out market and segment growth and then derives the Volkswagen Group’s delivery volumes from this
- The product program as the strategic, long-term factor determining corporate policy
- Capacity and utilization planning for the individual sites
The coordinated results of the upstream planning processes are used as the basis for the medium-term financial planning: the Group’s financial planning, including the brands and business fields, comprises the income statement, cash flow and balance sheet planning, profitability and liquidity, as well as the upfront investments needed for alternative products and the implementation of strategic options in the future. The first year of the medium-term planning period is fixed and a budget drawn up for the individual months. This is planned in detail down to the level of the operating cost centers.
The budget is reviewed each month to establish the target achievement level. Key internal management instruments comprise target/actual comparisons, prior-year comparisons, variance analyses and, where necessary, action plans to ensure targets are met. For the current fiscal year, detailed revolving monthly forecasts are prepared for the coming three months and the full year, taking into account the current risks and opportunities. The focus of intrayear internal management is therefore on adapting ongoing activities. The current forecast serves as the starting point for the subsequent medium-term and budget planning.
CORE PERFORMANCE INDICATORS IN THE VOLKSWAGEN GROUP
As part of our new leadership model, we have adjusted the core performance indicators in the Volkswagen Group. These now include:
- Deliveries to customers
- Sales revenue
- Operating result
- Operating return on sales
- Automotive investment ratio
- Net cash flow in the Automotive Division
- Net liquidity in the Automotive Division
- Return on investment (ROI) in the Automotive Division (until 2023)
Deliveries to customers (including the Chinese joint ventures) are defined as handovers of new vehicles to the end customer. This figure reflects the popularity of our products and is the measure we use to determine our competitive position in the various markets. Deliveries are closely related to our goal of transforming the Volkswagen Group into one of the world’s leading providers of sustainable mobility. One of the most important prerequisites for the Company’s long-term success is a strong brand portfolio that – on the basis of outstanding quality – offers tailor-made mobility solutions in the form of safe, connected, resource-efficient and thus largely emission-free vehicles that meet the diverse needs of customers. Demand for our products and mobility services guarantees not only unit sales and production, but also full utilization of our sites and the jobs of our employees. The goals we are striving for cannot be achieved without a skilled, flexible and dedicated workforce along with a consensus on shared values.
Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in financial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and documents the economic success of our core business. The operating return on sales is the ratio of the operating result to sales revenue.
The automotive investment ratio indicates the ratio of investment to sales revenue and is calculated by adding the research and development ratio (R&D ratio) and the capex to sales revenue ratio. The research and development ratio in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology to the development of our marketable products. Particular emphasis is placed on the environmentally friendly orientation and digitalization of our product portfolio, the expansion of our battery expertise, the development of software and new platforms and the creation of new technologies. The R&D ratio reflects the activities we have undertaken to safeguard the Company’s future viability. The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing, expanding, electrifying and digitalizing our product range and for environmentally friendly drivetrains, as well as for adjusting production capacities and improving production processes – in relation to the Automotive Division’s sales revenue.
Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities.
Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, time deposits and loans not financed by third-party borrowings. To safeguard our business activities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue.
We use the return on investment (ROI) to calculate the return on invested capital for a particular period in the Automotive Division, including the equity-accounted Chinese joint ventures on a proportionate basis, by calculating the ratio of the operating result after tax to average invested capital. If the return on investment (ROI) exceeds the market cost of capital, the value of the Company has increased. This is how we measure the financial success of our brands, locations and vehicle projects.
In our Financing the Transformation base initiative, we stepped up our activities to optimize net cash flow. To achieve the strategic goals, performance programs have also been launched Group-wide in an effort to increase efficiency and boost earnings.