Gazproms Financial Performance: Business Efficiency and Effectiveness - Coursework Example

Gazprom’s Financial Performance: Business Efficiency and Effectiveness Introduction This paper presents the following: first, a discussion of the differences between business efficiency and effectiveness. Second, three reasons why firms strive to achieve the highest level of efficiency and efficacy. Third, the analysis of Gazprom’s financial performance using ratios. Fourth, discussion of the limitations of using financial ratios to measure the performance of companies. Fifth, three non-financial elements of the balanced scorecard used in evaluating Gazprom’s performance. Last, comments concerning the overall performance of the enterprise. Financial analysis Financial analysis is the process that determines the financial performance of the organization by comparing the entities in the balance sheet with those contained in the income statement. The relationship between the items in the income statement and those in the balance sheet originates from the fact that it is the items in the balance sheet that give rise to items in the statement of operations such as sales and expenses (Kapil 2011, pp. 1-2). The analysis of the financial statement is important because it provides information needed by various users of the financial statement. Users need the information for decision-making. Some of the users and their information needs are as follows: shareholders would use the information to evaluate the ability of the company to pay the cash dividend. In addition, they use the information to assess the earnings per share. For that reason, they make investment decisions based on the profitability ratios, dividend ratios, earnings yield, and dividend payout ratio (Lasher 2008, pp. 64-65). The potential investors who provide capital to a company are concerned about both the short and long-term ability of the company to generate the required rate of return at a given level of risk. For that reason, they rely on dividend ratios, return ratios, gearing ratios for decision making on whether to buy or sell assets. They are also in need of the information that enables them to assess the ability of a corporation to pay the cash dividend. The employees need to know whether their employer is financially stable. They use the data to evaluate the employer’s ability to implement a fair remuneration package, provide retirement benefits and be able to offer employment chances. For that reason, employees rely on the profitability ratios for analysis (Lasher 2008, pp. 64-65). Lenders have both short and long-term interest in the firm. They use financial information to access the ability of a company promptly to pay both the principal and interest on loans. For that reason, they rely on the liquidity ratios, the profitability ratios, gearing ratios, and investment coverage ratio to conduct their analysis and make informed choices (Lasher 2008, pp. 64-65). Task 1 Business efficiency is a concept that refers to reducing the cost of the resources used in the company processes but maintain the quality levels high. The concept primarily relies on the need to reduce the operating costs without interfering with the quality of the production. Therefore, the summary of efficiency is (no time wastage + no resource wastage + high quality of production = business efficiency). On the other hand, business effectiveness is a concept that refers to the ability of a company to use the most appropriate strategies, resources, tools and equipment to ensure the achievement of the goals and objectives. For instance, let us assume that company X produces fresh juice D. The machine that presses the juice out of the fruits is serviced after every four hours of work. The machines capacity (in terms of the appropriate quantity of fruits pressed at a go) is three ten buckets (Information Resources Management Association, & Khosrow-Pour 2001, pp. 38-42). The machine can accommodate additional four buckets, but ten is the standard quantity to ensure that the fruits are drained next to dry. The squizzed juice is then left to settle for 45 minutes to allow the any foreign particle to settle. The mentioned standard procedure should be obeyed if the quality production is still an objective of company X. The company would be efficiently operating (by adhering to standards to minimize cost, reduce time wastage and ensure high quality of the juice). In case the machine service time was adjusted (without recommendation) to five hours, thirteen buckets of fruits pressed and the juice settlement period reduced to 20 minutes, time is wasted, the utilization rate of the fruits reduces and the fluid will contain unwanted particle (low quality). In this case, the company X’s efficiency would be low. Based on the hypothetical situation of Company X, it is clear how the production process deviated from the standard procedure. The deviation leads to variances both in the material budget, time and the planned quality of the juice. Company X can demonstrate a high level of effectiveness if the corrective measure is swiftly implemented (ensuring that only ten buckets of fruits are used, that the machine is serviced after four hours and that the juice is allowed to settle for 45 minutes). The swift implementation of the corrective measures is the demonstration of Company X’s effectiveness (Information Resources Management Association, & Khosrow-Pour 2001, pp. 38-42). Task 2 Businesses are interested in achieving the highest level of efficiency and effectiveness in order to increase the profitability level, reduce cost and growth. Companies that strive to minimize resource and time wastage reduces the chances of material wastage. The minimization of material wastage reduces the cost to the enterprise. From another point of view, the operating cost of the firm is minimized. In the income statement, the operating expenses reduces the level of net profit. Therefore, if the level of the operating costs is high, the level of net income decreases. Conversely, if the level of operating expenses is minimized, the standard of profitability increases. Therefore, companies strive to reduce the cost in order to increase the profitability level. Second, companies strive to attain a high degree of efficiency in order to maintain the quality level of productions (Information Resources Management Association, & Khosrow-Pour 2001, pp. 38-42). The competition in any industry is currently high. Companies must produce high-quality products to attract new customers and maintain the current ones. Constant production of quality products is a competitive advantage, thus, ensures a sustainable business operations. Therefore, in order to create a core competence, improve sales and increase the profitability, companies strive to accomplish a high level of efficiency and effectiveness. Third, companies should seek to reduce the cost, produce high-quality products and be quick to implement corrective measures in order to improve sales and increase the profitability. High level of profits enhances the liquidity of the company thus, increases its flexibility. A flexible company can easily pursue a viable investment opportunity thus, which increases the long-term value, thus, growth (Information Resources Management Association, & Khosrow-Pour 2001, pp. 38-42). Task 3: Ratio analysis (see appendix 1) Total assets turnover- the ratio measures the amount of revenue generated by the company’s total assets. It also indicates the utilization rate of the company’s total assets. Based on the analysis, the total assets turnover ratio of Gazprom for 2013 and 2014 are $ 0.2808 and $ 0.2852 respectively. In 2014, $ 1 of the total assets generated $ 0.2852 toward the sales. The analysis shows that the utilization rate of the total assets is fairly small (Kapil 2011, pp. 125-135). The trend indicates an increase in the ratio due to an increase in the revenue. Fixed asset turnover- the ratio shows the amount of income generated by the fixed assets. During the year 2013 and 2014, Gazprom’s ratio was $ 0.3568 and $ 0.3612 respectively. In the year 2014, $ 1 invested in fixed assets generated $ 0.3612 toward the revenue. The utilization rate of the fixed assets is slightly higher than that of the total assets (Gazprom annual report 2014, pp. 3-5). Revenue to working capital ratio- it shows the utilization level of the working capital. Concerning Gazprom, $ 2.564 and $ 2.448 are the ratios for 2013 and 2014 respectively. In the year 2014, $ 1 of working capital was utilized to generate $ 2.448 toward revenue, which shows a high level of efficiency for both years. Operating expense ratio – displays the effectiveness of the company’s cost management strategies. Concerning Gazprom, $ 0.6883 and $ 0.7533 are the ratios for the year 2013 and 2014 respectively. In the year 2014, there was $ 0.7533 for every $ 1 of revenue. Based on the analysis, the operating expenses were high in both years (Kapil 2011, pp. 125-135). Return on investment- it shows the utilization rate of the net total assets. Concerning Gazprom, $ 0.0911 and $ 0.0594 are the ratios for the year 2013 and 2014 respectively. In 2014, $ 1 invested in the net total assets was utilized to generate only $ 0.594, which is a decrease compared to the previous years’ value. During both periods, the utilization rate of the net total asset was low indicating a high level of ineffectiveness (Gazprom annual report 2014, pp. 3-5) Task 4 First, the ratio analysis overlooks the inflation factor. In some instances, an increase in sales could be due to a rise in the inflation. Ratio analysis fails to capture the effect of inflation, thus, is not a useful tool for analysis. Second, the ratio analysis does not capture the qualitative factors influencing the performance of a firm such as the corporate image. Therefore, it is not suitable for a comprehensive analysis of corporations. Last, the ratios analysis depends on the historical information. For this reason, the data is not suitable for future decision-making. Task 5 The following three non-financial perspective of the balanced scorecard are suitable for assessing Gazprom’s performance: the customer, the internal process and the growth and development perspective. Based on the client perspective, Gazprom should consistently meet the customers’ needs. Meeting customer needs involve a prior analysis of the customer’s requirement followed by the development of products and services that precisely meet the identified needs. Therefore, satisfied customers shows that the operations of Gazprom is efficient and effective (Person 2013, pp. 31-47). Based on the internal process perspective, Gazprom should improve the existing production process and acquire new and advanced production assets. It is also advised that a healthy customer interaction process should be adopted in order to build a healthy rapport with the clients and the company. Therefore, efficient and effective production process reflects the performance of the enterprise. Last, based on the growth and learning perspective, a highly skilled employees who are aware of the business’s goals improves the quality of production thus enhances the efficiency of the enterprise. Therefore, if Gazprom employees are trained and developed, that forms a basis for assessing its performance (Person 2013, pp. 31-47). Comments Based on the above ratio analysis, the utilization rate of the total assets, net total assets, and fixed assets are small. On a similar not, the cost management strategy of Gazprom is ineffective for both periods. Therefore, in order to attain an attractive level of efficiency and effectiveness, the company should increase the utilization rate of the assets and formulate more efficient cost reduction strategies. List of References Gazprom annual report 2014, Viewed 27 February 2015, http://www.gazprom.com/f/posts/91/415561/gazprom-ifrs-3q2014-en.pdf Information Resources Management Association, & Khosrow-Pour, M. 2001, Managing information technology in a global environment, Idea Group Publishing, Hershey, PA. Kapil, S 2011, Financial Management, Pearson, Noida, India. Lasher, W 2008, Practical financial management, Thomson South-Western, Mason, OH. Person, R. 2013, Balanced Scorecards & Operational Dashboards with Microsoft Excel, Wiley [Indianapolis, IN?]. Appendix 1: the ratios 2014 2013 Total asset turnover (Revenue/Total assets) 0.2852 0.2808 Fixed asset turnover (Revenue/Avg fixed asset) 0.3612 0.3568 Revenue to W/C (Revenue/working capital) 2.448 2.564 Operating expense ratio (operating exp./Revenue) 0.7533 0.6883 Return on Investment (PBT/Net total asset) 0.0594 0.0911 Read More