Factors to Drive Performance of a Company - Coursework Example

ACCOUNTING COUSEWORK Contents Introduction 3 Task1 3 Task 2 4 Task 3 5 Task 3A 5 Task 3B 6 Task 3C 6 Task 3D 7 Task 3E 8 Task 4 9 Task 5 10 Task 6 11Conclusion 11 Reference 13 Appendices 14 Introduction The following report is primarily aimed at finding and describing about the factors that drive a company’s performance. The report starts with a discussion of effectiveness and efficiency with relation to a company and choosing which one of them is more important. The report also focuses on the steps taken by the company to improve these factors. The discussion also focuses on ratio analysis of two consecutive years to find out a change in performance of the company. The report also focuses on using balance score card as framework to use 3 non financial methods in accessing a company’s performance. The company chosen in this report is Google. Task1 The two ways to improve the performance of a company is through either effectiveness or efficiency. These two similar sounding words are actually much different in meaning and a business can successfully reach its goal if it does these two things successfully. Efficiency Efficiency refers to doing things right in the least time possible. Efficiency measures the time it takes to do something (Martin, 2012). While inefficient employees take long time in doing a work, efficient employee and manager do a given task in the least time possible using the least amount of resources using certain time saving strategies. Effectiveness Effectiveness refers to doing things in the right way so that particular results are derived (Lawler, 2012.). Effectiveness actually refers to the level of results that is derived from a company’s workforce. Employees who demonstrate effectiveness produces high quality results. To only be efficient but not being effective is actually useless (Herschel, 2012.). For example if a salesman is both efficient and effective he would be able to make sales in a better way. Task 2 To reach position of higher growth a company goes in for effectiveness and efficiency. A company which goes in for only efficiency or only effectiveness does not reach the goal. For achieving growth and desired objective the employees should be efficient and effective at the same time. If the employees of a company are efficient but effective they will not be able to achieve the desired output. Similar is the case of the employees who are effective but not efficient. The employees who are efficient but not effective will be able to achieve a result first but the result achieved will not be the desired one. Similarly the employees who are effective but not efficient will be able to achieve the result but the time taken by them will be far greater. Thus for the growth of the company it is required that the employees are efficient as well as effective. Task 3 Task 3A Total assets turnover ratio = Revenue / Average Total Assets Total asset turnover ratio of 2014 Revenue= $ 66,001 (Google, 2014) Average Total asset = (131133+110920)/ 2 => 121026.5 Total asset turnover ratio= 66001/121026.5 => 0.545 Total asset turnover ratio of 2013 Revenue= $55,519 (Google, 2013) Average total asset=> (110920+93798)/2 => 204718 Total asset turnover ratio = 55519/ 204718 => 0.27119 Particulars 2013 2014 Total asset turnover ratio 0.27119 0.545 The asset turnover ratio of a company represents how efficiently the company uses the assets of the company in generating revenue. The numerator of the ratio is represented by total revenue and the denominator is represented by average total assets. The greater the ratio the more better it is for a company. However this ratio tends to be higher for a consumer company and lower for a telecom company. This is because the asset base of a telecom company is greater than the asset base of a consumer goods company. So while comparing this ratio the industry type should be kept in mind. However by looking at the ratio over the consecutive years for Google it is noted that Google has been progressively using the total assets efficiently. Task 3B Fixed assets turnover ratio = Revenue / Average Fixed Assets Fixed asset turnover ratio of 2014 Revenue= $ 66,001 Average Fixed asset = (23883+16524)/ 2 => 20203.5 Fixed asset turnover ratio= 66001/20203.5 => 3.26 Fixed asset turnover ratio of 2013 Revenue= $55,519 Average Fixed asset=> (16524+11854)/2 => 14189 Fixed asset turnover ratio = 55519/ 14189 => 3.91 Particulars 2013 2014 Fixed asset turnover ratio 3.91 3.26 The fixed asset turnover ratio signifies how efficiently a company uses its fixed assets to generate revenues. For Google it is seen that the ratio has decreased over the two consecutive years which means that Google’s efficiency of using its fixed assets in generating revenue has decreased over the years. Task 3C Ratio of revenue to working capital = Revenue / Working capital Revenue to working capital ratio of 2014 Revenue= $ 66,001 Working capital= 80685-16805 => 63880 Revenue to working capital= 66001/ 63880 => 1.03 Revenue to working capital ratio of 2014 Revenue= $55,519 Working capital= 72886-15908=> 56978 Revenue to working capital= 55519/56978 => 0.974 Particulars 2013 2014 Working capital turnover ratio 1.03 0.974 The working capital of the company is defined as the amount by which the current assets of the company exceed the current liability of the company. The higher the current assets of the company higher are the ability of the company to meet its current obligation. If the current asset of the company does not exceed the current liability of the company it means that the company is not being able to use its current assets efficiently. The ratio of the working capital tells how efficiently the working capital is being used to finance operations that ultimately drive the revenue of the company. A declining working capital ratio over the ratio means that the company is not being able to use the working capital efficiently and is a bad sign for the company. For Google it is seen that the working capital turnover ratio of the company was slightly higher in 2013 compared to 2014. Task 3D Operating expense ratio = Operating Expenses / Revenue Operating expense ratio of 2014 Revenue= $ 66,001 (Yahoo, 2015) Operating expenses= 9832+8131+5851=> 23814 Operating expense ratio=> 23814/ 66001 => 0.36 Operating expense ratio of 2013 Revenue= $55,519 Operating expenses= 7137+6554+4432 => 18123 Operating expense ratio=> 0.3264 Particulars 2013 2014 Operating expense ratio 0.36 0.32 The` operating expense ratio measures what it costs to own a property vs. the amount of income that the property brings in. Operating expense ratio is calculated by dividing the total revenue by operating expenses. The lower is the operating expense for a particular company it means the company has to spend less in earning its gross profit and net profit in turn. For Google we see that the operating expense ratio has decreased slightly from 2013 to 2014 which is a good sign for the company. Task 3E Return on investment = Net Profit before Tax / Net Total Assets Return on investment ratio of 2014 Net profit before taxes=> 17259 Total assets => 131133 Return on investment => 17259/131133 => 0.1316 Return on investment ratio of 2013 Net profit before taxes => 15899 Total assets => 110920 Return on investment => 15899/110920 => .1433 Particulars 2013 2014 Return on investment 0.1433 0.1316 The return on investment ratio of a company gives the ratio between the net profit before taxes and net total assets. The return on investment defines how efficiently the company uses total assets in generating profit for the company. Obviously higher is the return on investment for a company better it is for the company. In case of Google one sees that the Return on investment for the company has slightly decreased over the two years for which the ratio has been studied. Task 4 There are many limitations associated with ratio analysis. Some of these limitations are listed below. The ratios are as good as the underlying accounting data. If there is some mistake in estimating those data then the whole ratio calculation loses its meaning. Ratios are comparable only between two companies that are from the same industry. For companies belonging to different industries cannot be compared with the ratio analysis. This becomes a problem for a multi-diversified company who have businesses in different industries. Sometimes inflation may have wrecked havoc on the balance sheet data and the profitability has been badly affected. This should be taken into consideration while comparing the ratios for subsequent years. Task 5 Figure 1 Balance score card (Source: Balance Score Card Institute, 2014) Since there are limitations associated with financial ratios alone is accessing the performance of a company there are other dimensions too which can be taken into account while analyzing the performance of the company. The other factors which can be taken in analyzing the performance of the company is given by the balance score card model stated by Kaplan and Norton. The three other dimensions that are taken into account while analyzing the performance of the company are internal business processes, organizational capacity and customer satisfaction. In the internal business process the question that a company should ask itself is what are the internal business processes the company need to excel at; in order to achieve its vision and provide customer satisfaction? Similarly the question to be asked in customer/ stakeholders is provided satisfaction in order to achieve the company’s vision? Similarly the question to ask in organization capacity is what is learning and continuous improvement the company should aim at achieving in order to achieve its vision? Task 6 After analyzing Google’s performance from financial and non financial aspect, is can be said that Google has performed quite well over the span of two years. Although some of the ratios have decreased from 2013 to 2014 but the overall performance of Google has improved over the two years has improved from 2013 to 2014. The Google is an innovation based company and that means the company is continuously growing and will continue to grow over the years. Conclusion After analyzing the company from all the different dimensions it was being able to analyze the performance of Google over the course of report. The analysis of the performance of the company was not complete only from the financial point of view but also from other point of views. Reference Google Inc, 2013. Google form 10-k. [online] Available at < https://investor.google.com/pdf/20131231_google_10K.pdf > [Accessed 17 February 2015]. p. 4. Google Inc, 2014. Google form 10-k. [online] Available at < http://investor.google.com/pdf/20141231_google_10K.pdf > [Accessed 17 February 2015]. p. 6. Yahoo Finance, 2015. Google Inc. [online]. Available at < https://in.finance.yahoo.com/q/in?s=GOOG > [Accessed 17 February 2015]. Balance Score Card Institute, 2014. Balance score card basics. [online] Available at < http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard > [Accessed 17 February 2015]. Martin, M., 2012. Business efficiency for dummies. London: John Wiley & Sons. pp. 59-62. Lawler E., 2012. Effective human resource management: A global analysis. CA: Stanford University Press. pp. 114-117. Herschel, R.T., 2012. Organizational applications of business intelligence management: Emerging trends. Hershey: IGI Global. pp. 78-82. Appendices Appendix 1 Appendix 2 Read More