BMW 2005 Annual Report Download - page 42

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Analysis of the Group Financial Statements
Group internal management system
The underlying objective of BMW Group’s internal
management system is to increase the value of the
Group as a whole. The targets set for the Automo-
biles, Motorcycles and Financial Services segments
all stem from this objective. Within the Automobiles
and Motorcycles segments, this approach is put into
practice for specific product, process and structure-
related projects. By contrast, the Financial Services
segment is primarily concerned with the cash flows
resulting from its credit and lease portfolio.
The strategies set for each line of business and
related project decisions give rise to strategic em-
phases which are then implemented at a functional
level. The overall project development process be-
comes more targeted as a result of the closer link
between strategies defined for lines of business
and objectives defined for specific projects. Once
a project decision has been reached, the task is to
manage each individual project over time. Projects
are therefore observed and resources reallocated,
where necessary, according to priorities.
The project decision and related project selec-
tion are therefore important aspects of the value-
based planning process of the BMW Group. Net
present values (NPVs) and rates of return are com-
puted as part of the decision-making process: this
involves computing the present value of cash flows
and the internal project rate of return (or model rate
of return in the case of vehicle projects) which are
expected to be generated by a project decision.
The discount rate used in these computations is
the group-specific minimum required rate of return
derived from the capital market (weighted average
cost of capital). Using this method, the amount by
which a project will contribute to the total value of
the segment (i.e. the project’s value-added) can
be documented at the same time that the project
decision is taken. Targets and performance are con-
trolled using project-related target NPVs and indi-
vidual cash flow related parameters which have an
impact on those values.
The NPV of a project programme is computed
by aggregating the amounts for all projects and
discounting them back to a specific date; this value
serves as the main target for the Automobiles and
Motorcycles segments. The business value of each
segment is then computed by deducting the fair
value of debt capital. For both of these segments,
the objective is to increase business value, as com-
puted above, on a continuous basis.
The management of product projects and of
the product programme as a whole described above
is subject to basic conditions which result from
periodic planning. The aim here is to monitor and
manage periodic targets on a long-term basis.
Periodic performance is managed in the light of
defined accounting policies and external financial
reporting requirements. The BMW Group primarily
uses profit before tax and segment-specific rates
of return as the key indicator figures by which it
manages operating performance. For example,
return on capital employed is used as the main per-
formance parameter of the Automobiles and Motor-
cycles segments. Return on sales is also used as
a measurement basis. In the case of the Financial
Services segment and the Group as a whole, the
return on assets is used. The overall target set
for earnings is continuous growth; the minimum
rate of return required for each line of business is
used as the relevant parameter. These periodic tar-
gets are supplementary to project and programme
targets.
In order to implement this comprehensive target
and management system, whilst at the same time
satisfying periodic reporting and accounting require-
ments, the model analyses for each project decision
reached the impact of cash flows on both the NPV
and the model rate of return, as well as the impact
on earnings. This approach enables the BMW Group
to analyse the effect of each project-based decision
on business value (quantified in terms of the NPV
of the project programme) as well as on earnings
and rates of return. “Multi-project planning” data