Measuring Business Performance - Coursework Example

Measuring Business Performance affiliation Table of contents Introduction……………………………………………………………………….…….2 2. Task …………………………………………………………….…………..2 3. Task 2……………………………………………………………...……………………2 4. Task 3………………………………………………………………………...…………3 5. Task 4…….……………………………………………………………………………..4 6. Task 5…………………………………………………………………………………...5 7. Task 6………….………………………………………………………………………..6 8. Conclusion…………………………………………………………………………..….7 References………………………………………………………………………………8 Appendix…………………………………………………………………………………9 Measuring Business Performance Introduction This is a report about business performance. It will use various financial ratios like total turnover ratio, fixed assets turnover ratio, ratio of revenue to working capital and operating revenue ratio to determine the financial performance of Microsoft Corporation. Afterwards, it will discuss three non-financial indicators that a business can also use to measure its performance. The three indicators that will be discussed are human resource management, quality of goods and services that a company produces and the degree of awareness the public has towards the company’s brand and profile. Task 1 Kinney (2009) defines effectiveness is the state of doing the right things within and the limits that have been put, on the other hand efficiency is the state of doing things the right way. Effectiveness aims at outcome regardless of how resources are used while in efficiency focus on the process considering resource allocation. A good example is a company that deals with customer care services, if a worker achieves their daily target then they are effective. However, reaching targets does not mean all the calls successfully connected the customer. On the other hand, a worker may not reach the daily set targets but all his or her calls connect to customers, this is efficiency. Task 2 1. Efficiency and effectiveness enables a company saves resources and ensures maximum utilization of the same. When employees work efficiently, they utilize most of the resource with minimal or no wastage respectively. In doing so, the purposes for which the resources were intended for will are met. If efficiency is not there, some resources will be wasted meaning that new ones will have to be purchased thus affecting maximization of the resources. 2. Effectiveness and efficiency leads to expansion of a business. Through effectiveness company can meet targets and produce large volumes of quality goods per a given period of time. This means that the company will sell more goods per unit period. Increase in sales leads to purchase of new equipment that will demand space. The company will therefore expand so as to provide room for the equipment. 3. Efficiency and effectiveness increases profit margin of a company. When a company is efficient, it means that they are maximizing the use of the available resources. If effectiveness is applied, then the company will produce more commodities with minimum materials hence bringing up the profit margin of the company. Task 3 a) Total assets turnover ratio = (revenue / average total assets) = 77,849 / ((172,384 + 142,431) / 2) = 0.551644617 Microsoft is not efficient in utilizing its total assets for 2013 and 2014 since $1 give the company revenue of $0.551644617. b) Fixed asset turnover ratio = (revenue / average fixed assets) = 86,833 / ((92,730 + 76,649) / 2) = 1.025310103 The company has enough fixed assets to enable it generate income that can sustain it as indicated by the ratio 1.025310103. c) Revenue in 2014 = 86,833 Working capital in 2014 = current assets – current liabilities = 79,645 – 52,764 = 26,890 Ratio of revenue to working capital = revenue / working capital = 86,833 / 26,890 = 3.2292 In the year 2014, Microsoft was efficient in utilizing its working capital; $1 gives a return of $3.2292. Revenue in 2013 = 77,849 Working capital in 2013 = 65,782- 63,264 = 2,518 Ratio of revenue to working capital = 77,849 / 2,518 = 30. 917 In the year 2013, Microsoft was efficient in utilizing its working capital; $1 gives a return of $30. 917. d) Operating expense ratio = total operating expenses / revenues Year 2014 83,784 / 86,833 = 0.9649 Year 2013 73,944 / 77,849 = 0.9370 The company is spending less than it earns as indicate by the ratio which are less than 1in both years, that is, 0.9649 and 0.9370 respectively. Task 4 Lyons (2013) note that in case of inflation, it is very hard to determine the performance of accompany using financial ratios, this is because inflation greatly distorts the balance sheet of a company. In addition to that, the profits of the organization will also be affected. The company will therefore rely on judgment to interpret some of the figure which in the long-run gives false information about the performance of the company. Secondly, as observed in all the ratios above, they all deal with numbers and do not address the issue of quality, customer experience, and morale on the employees among other. There good ratios may indicate the company is doing well financially but it is deteriorating on one side. Use of ratio is therefore not good indicators of the overall performance of a company. Finally, concurrent appearance of good and bad ratios may make it difficult for a company to tell whether its performance is poor or excellent. A good example is when the total assets turnover ratio too low while on the other hand, the fixed asset turnover ratio and ratio of revenue to working capital are too high. This data can be interpreted in different ways leading to confusion and that explains why financial ratio is not effective indicator of financial performance of a business (Marr, 2011). Task 5 According to Kaplan and Norton (1996) completes in order to determine complete success of a business, financial methods alone are insufficient, it is also important to analyses the three non-financial methods: human resource management, quality of product and services and finally being aware of the brand and company profile. Human resource management is the monitoring of staff in order to evaluate the performance of a company. Common factors that are looked upon are % turnover of staff, staff competence, and % of accepted jobs out of the job offered and the results of job satisfaction obtained in surveys. The second non-financial indicator is quality of product and services. Customer is always attracted to quality goods and services. If accompany fails to produce quality commodities, they lose customers and this affects their future sales. In order to maintain quality, the company should compare their products with those of their competitors so as to set a standard. Finally, the company should be aware of their brand and profile. It is important to note that maintaining the brand of a company may seem expensive in the short run yet it has substancial returns in the long run. In order to measure the impact the company’s’ profile has on public, a company should consider the following: how loyal it is to customers, how well do people know about the company, what is the public perception of the quality of goods and services of the company and lastly the company should put into considerations other factors like patent and trademark. Task 6 The general performance of the company is average. From analysis of the data above, Microsoft Corporation is making profit from its operation. Though its fixed assets do not bring revenue to the company, it is effectively utilizing its working capital to make a lot of revenue. In addition to that, it has a managed to maintain a less than one operating expense ratio. This means that it is spending less than it earns enabling it to retain some revenue as net profit. Conclusion Business need to conduct frequent or annual performance check on their operations. It is in doing so that they will be able to know if their operations are effective, efficient or both. Companies are urged to use financial ratios like total turnover ratio, fixed assets turnover ratio, ratio of revenue to working capital and operating revenue ratio. In addition to that, they should also uses non-financial indicators to enable them effectively determine the general performance of their organization. In doing so, business will help correct their weakness thus enabling them working optimally hence reaping more profits. References Kaplan, R.S & Norton, D.P (1996). Putting the balance scorecard to work. New York: Harvard Business Review. Kinney, W. (2009). Measuring performance in multi-outlet business. New Haven: Administration, Michigan State University. Lyons, T. (2013). Social entrepreneurship: how business can transform society. New York: Praeger. Marr, D. (2011). Handbook of corporate performance a practitioner guide to perception surveys. Boston: Wiley. Appendix Microsoft Corporation for the Year ended June 30 Figure are in million dollars 2014 2013 Revenue 86,833 77,849 Operating income 27,759 77,849 Diluted earnings per share 3 3 Cash dividend per share 1 1 Investment 85,709 77,022 Long term liabilities 36,975 26,070 Current liabilities 52,764 63,264 Operating expenses 83,784 72,944 Current assets 79,654 65,782 Fixed assets 92,730 76,649 Total assets 172,384 142,431 Read More