Measuring Business Performance for Apple - Coursework Example

MEASURING BUSINESS PERFORMANCE By of the of the School Table of contents Title page……………………………………………………………………………...1 Introduction……………………………………………………………………..……3 Task 1………………………………………………………………………………....3 Task 2…………………………………………………………………………………4 Task 3………………………………………………………………………………4-6 Task 4………………………………………………………………….……………..7 Task 5……………………………………………………………………..………….7 Task 6…………………………………………………………………………………9 Conclusion……………………………………………………………………………..9 References……………………………………………………………………………10 Appendix……………………………………………………………………………11 Introduction Measuring business performance entails both financial and non-financial methods. The report discusses financial methods such as ratio analysis and non-financial methods such as customer satisfaction, time of developing new products and corporate social responsibility. Further, the report defines and explains the difference between efficiency and effectiveness as well as the reasons why businesses prefer higher levels of efficiency and effectiveness. In addition, it carries out ratio analysis of Apple and then discusses drawbacks of financial ratios. Finally, the report provides comments on the Apple’s overall performance over two consecutive financial periods reviewed. TASK 1 Efficiency and effectiveness in business According to Chary (2009: 19.7) efficiency is defined as the ability of a business to produce a desired effect, service or a product with a minimum amount of effort. While effectiveness is defined as the degree or extent to which objectives are achieved, it is being successful in realizing or achieving what is required. Wharton (2012) defines effectiveness as the total output that is generated while efficiency refers to the economy in the utilization or use of resources to perform a task. Hypothetical illustration Assume a lathe operator assigned to make bushes, makes 500 bushes per shift using 25 kilogram of steel rod. The effectiveness is that the operator makes 500 bushes per shift while the efficiency is that the operator produces 25 bushes per kilogram of steel rod. TASK 2 Achieving higher levels of efficiency as well s effectiveness has the following importance. i) Higher levels of effectiveness and efficiency contribute to better results. They enable the company to increase their productivity by producing lower cost goods and services than competitors. This therefore makes the company to make higher profit for each unit sold or offer lower price than competitors to the customers (Wharton (2012: 24). ii) The company is able to develop a competitive advantage over its competitors. Higher levels of efficiency and effectiveness enable organizations to produce high quality goods and services. The organization is able to utilize their resources optimally to achieve desired output thus being ahead of their competitors (Chary, 2009: 19.8). iii) Finally, achieving higher levels of effectiveness and efficiency enables businesses to learn how to energize their workforce to focus on common goals. It helps the organization to manage and direct their human capital towards goal achievement and mission fulfillment. The organization is therefore able to create better communication, leadership, interaction, direction, adaptability as well as positive environment (Chary, 2009: 19.8). TASK 3 a) Total assets turnover ratio. Total assets turnover ratio = Revenue / Average Total Assets Average total assets= (beginning assets + ending assets)/2 2014: 39510/ [(207000+231839)/2] = 0.18 times 2013: 37037/ [(176064+207000)/2] = 0.19 times Apple is not that efficient in utilising its assets to generate income. The total asset turnover ratio is very minimal. In addition, the efficiency of the company reduced from 0.19 times in 2013 to 0.18 times in 2014. The ratio implies that for every dollar in its assets, it only generates 18 or 19 cents. The company is, therefore, less efficient in using its assets (Kimmel et al.2008: 298). b) Fixed assets turnover ratio (or non-current asset turnover ratio) Fixed assets turnover ratio = Revenue / Average Fixed Assets OR Non-current Assets turnover ratio = Revenue / Average Non-current Assets Average non-current assets= (beginning non-current assets + ending non-current assets)/2 2014: 39510/ [(145308+133714)/2] = 0.283 times 2013: 37037/ [(118411+133714)/2] = 0.294 times Apple is less efficient in using fixed assets to generate revenue. The ratios are less than 0.5 meaning it is only generating 29 cents or 28 cents for each dollar of investment in fixed assets (Kapil, 2011: 125). Non-current asset turnover ratio decreased from 0.29 in 2013 to 0.28 in 2014 indicating a further drop in efficiency. In overall, the Apple’s fixed assets are inadequate in generating enough revenue in the last two years. c) Ratio of revenue to working capital n Ratio of revenue to working capital = Revenue / Working capital Working capital= current assets –current liabilities 2014: 39510/ [68531-63448] = 7.773 2013: 37037/ [73286-43658] = 1.25 Apple is very efficient in utilising working capital in generating revenue. The efficiency substantially rose from 1.25 to 7.773 in 2014. The ratio indicates that for each one dollar of working capital, Apple generated $1.25 in 2013 and $7.77 in 2014. Apple is efficient in turning over or utilising its working capital to earn revenue (Kimmel et al.2008: 298). d) Operating expense ratio Operating expense ratio = Operating Expenses / Revenue 2014: 18034/39510= 45.64% 2013: 15305/37037=41.32% Apple’s cost of operations is relatively high since it is more than one-third. Even though the company made enough revenue; its operating costs have been increasing over time (Kapil, 2011: 122). Its operating expense ratio increased from 41.31% in 2013 to 45.645 in 2014. The ability of Apple to generate revenue has therefore decreased. e) Return on investment Return on investment = Net Profit before Tax / Net Total Assets 2014: 53483/231839= 23.07% 2013: 50155/207000=24.23% Apple is relatively efficient in using net total assets to generate revenue. There was a minimal reduction in the ROI from 24.23 percent in 2013 to 23.07 percent in 2014. This is an indication that Apple is fairly efficient in its operations and the way it uses each dollar of investment to generate a net profit (Kimmel et al.2008: 298). TASK 4 Briefly explain three drawbacks in the use of financial ratios as an indicator of a company’s performance overtime. (6 marks) i) Misleading comparison ii) Comparing companies from different industries using ratio analysis may be misleading because the companies are subject to different environmental factors or conditions like regulation, market structure and other factors (Kimmel et al. 2008: 290). iii) Financial ratio analysis often explains the relationship between past or historical data or information while the users of financial ratios are usually concerned about current and future information (Kapil, 2011: 125). Therefore, financial ratios do not provide complete information for future forecasting and planning (Kimmel et al. 2008: 290). iv) Financial ratio analysis ignores qualitative data because it is concerned with quantitative viewpoint. It fails to address important factors like product quality, customer experience, management skills and employee morale (Kapil, 2011: 122). This makes it very hard to draw inclusive conclusions regarding the overall performance and the health of the organization using the financial ratios alone (Kimmel et al. 2008: 290). TASK 5 Non-financial methods for assessing a company’s performance i) Customer satisfaction This entails meeting customer needs in their three areas of concern: quality, time, performance and cost. This method measures the performance of a company in terms of how well it develops and maintains a value of brand or company profile in the eyes of the customers (Warren et al. 2015: 298). According to this method, a company that performs well tends to have high customer loyalty, extensive brand recognition or name awareness, as well as good perceived quality. This method requires that accompany be able to meet each need of a customer in a timely manner, affordable price and high quality. ii) Corporate citizenship This measures the performance of a company in terms of how well it supports the communities in which it operates (Warren et al. 2015: 298). A successful and a better performing company should be able to create a positive environment as well as promote enthusiasm and education for technology among the younger generation thus creating value to both the company and the society. Warren et al. (2015) states that a good company should be able to support initiatives around the globe through sponsorships, donations and other means. iii) Innovativeness of a company (time to develop new products) According to Heilman and Kennedy-Phillips (2011) it measures the speed with which a company develops new products so as to be able to succeed in the intensely competitive global business environment. A successful company is able to make continual improvements to the products so as to launch new products, improve operating efficiencies and create more value for clients continually. This method measures the ability of a company to improve and innovate (Warren et al. 2015: 298). A better performing company should be able to penetrate new markets, grow and increase shareholder value. Such a company develops high-quality products that meet customer needs and expectations thus having superior performance. TASK 6 Company’s overall performance over two consecutive financial periods reviewed In overall, Apple is effective and efficient in its operations, however, the efficiency and effectiveness reduced in 2014. The company was able to achieve better results from its operations. It has a competitive advantage over its competitors like Oracle and Microsoft. Apple is relatively efficient in using fixed assets to generate revenue. It had a higher profitability in 2014 compared to 2013, but the efficiency reduced due to a significant increase in operating expenses. Apple is highly innovative and produces high-quality products for their customer. Apple has over the years met the diverse and ever exchanging needs of their customers. Conclusion Higher levels of efficiency and effectiveness are very crucial for a business. They provide the business with better results, competitive advantage as well as a direction towards goal achievement and mission fulfilment. Apple is fairly efficient and effective in its operations. It has better results, competitive advantage and corporate social responsibilities compared to other competitors. It has a high ability to improve its products and innovate as evidenced by its ability to penetrate new markets. It has high-quality products that meet customer needs and expectations. In overall, Apple has superior performance. References Chary, S. N. (2009). Production and operations management. New Delhi: Tata McGraw-Hill. Heilman S., and Kennedy-Phillips L. (2011). Making Assessment Easier With the Organizational Effectiveness Model describe a comprehensive, step-by-step, mixed-methods assessment model. Published online by American College Personnel Association and Wiley Periodicals, Inc. Volume 15, Issue 6, pages 29–32, DOI: 10.1002/abc.20046. Kapil, S. (2011). Financial management. Noida, India, Pearson.   Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2008). Accounting: tools for business decision making. Chichester, John Wiley. Warren, C., Reeve, J., & Duchac, J. (2015). Managerial Accounting. New York: Cengage Learning. Wharton, A. (2012). Cambridge Checkpoints VCE Business Management Units 3 and 4 2013. Cambridge: Cambridge University Press. Apple 2014 annual reports Retrieved from: http://investor.apple.com/secfiling.cfm?filingid=1193125-14-383437&cik= Apple 2013 annual report Retrieved from: http://investor.apple.com/secfiling.cfm?filingid=1193125-12-444068&cik= Appendix CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except number of shares which are reflected in thousands and per share amounts)          Years ended          September 29, 2012      September 24, 2011      September 25, 2010   Net sales    $ 156,508       $ 108,249       $ 65,225    Cost of sales      87,846         64,431         39,541                               Gross margin      68,662         43,818         25,684                               Operating expenses:          Research and development      3,381         2,429         1,782    Selling, general and administrative      10,040         7,599         5,517                               Total operating expenses      13,421         10,028         7,299                               Operating income      55,241         33,790         18,385    Other income/(expense), net      522         415         155                               Income before provision for income taxes      55,763         34,205         18,540    Provision for income taxes      14,030         8,283         4,527                               Net income    $ 41,733       $ 25,922       $ 14,013                               Earnings per share:          Basic    $ 44.64       $ 28.05       $ 15.41    Diluted    $ 44.15       $ 27.68       $ 15.15    Shares used in computing earnings per share:          Basic      934,818         924,258         909,461    Diluted      945,355         936,645         924,712    Cash dividends declared per common share    $ 2.65       $ 0.00       $ 0.00    See accompanying Notes to Consolidated Financial Statements.   43 CONSOLIDATED BALANCE SHEETS (In millions, except number of shares which are reflected in thousands)        September 29, 2012      September 24, 2011   ASSETS:       Current assets:       Cash and cash equivalents    $ 10,746       $ 9,815    Short-term marketable securities      18,383         16,137    Accounts receivable, less allowances of $98 and $53, respectively      10,930         5,369    Inventories      791         776    Deferred tax assets      2,583         2,014    Vendor non-trade receivables      7,762         6,348    Other current assets      6,458         4,529                      Total current assets      57,653         44,988    Long-term marketable securities      92,122         55,618    Property, plant and equipment, net      15,452         7,777    Goodwill      1,135         896    Acquired intangible assets, net      4,224         3,536    Other assets      5,478         3,556                      Total assets    $ 176,064       $ 116,371                      LIABILITIES AND SHAREHOLDERS’ EQUITY:       Current liabilities:       Accounts payable    $ 21,175       $ 14,632    Accrued expenses      11,414         9,247    Deferred revenue      5,953         4,091                      Total current liabilities      38,542         27,970    Deferred revenue - non-current      2,648         1,686    Other non-current liabilities      16,664         10,100                      Total liabilities      57,854         39,756                      Commitments and contingencies       Shareholders’ equity:       Common stock, no par value; 1,800,000 shares authorized; 939,208 and 929,277 shares issued and outstanding, respectively      16,422         13,331    Retained earnings      101,289         62,841    Accumulated other comprehensive income      499         443                      Total shareholders’ equity      118,210         76,615                      Total liabilities and shareholders’ equity    $ 176,064       $ 116,371                      CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except number of shares which are reflected in thousands and per share amounts)        Years ended        September 27, 2014      September 28, 2013      September 29, 2012   Net sales    $ 182,795       $ 170,910       $ 156,508    Cost of sales      112,258         106,606         87,846                               Gross margin      70,537         64,304         68,662                               Operating expenses:          Research and development      6,041         4,475         3,381    Selling, general and administrative      11,993         10,830         10,040                               Total operating expenses      18,034         15,305         13,421                               Operating income      52,503         48,999         55,241    Other income/(expense), net      980         1,156         522                               Income before provision for income taxes      53,483         50,155         55,763    Provision for income taxes      13,973         13,118         14,030                               Net income    $ 39,510       $ 37,037       $ 41,733                             CONSOLIDATED BALANCE SHEETS (In millions, except number of shares which are reflected in thousands and par value)        September 27,  2014      September 28,  2013   ASSETS:    Current assets:       Cash and cash equivalents    $ 13,844       $ 14,259    Short-term marketable securities      11,233         26,287    Accounts receivable, less allowances of $86 and $99, respectively      17,460         13,102    Inventories      2,111         1,764    Deferred tax assets      4,318         3,453    Vendor non-trade receivables      9,759         7,539    Other current assets      9,806         6,882                      Total current assets      68,531         73,286    Long-term marketable securities      130,162         106,215    Property, plant and equipment, net      20,624         16,597    Goodwill      4,616         1,577    Acquired intangible assets, net      4,142         4,179    Other assets      3,764         5,146                      Total assets    $     231,839       $     207,000                      LIABILITIES AND SHAREHOLDERS’ EQUITY:    Current liabilities:       Accounts payable    $ 30,196       $ 22,367    Accrued expenses      18,453         13,856    Deferred revenue      8,491         7,435    Commercial paper      6,308         0                      Total current liabilities      63,448         43,658    Deferred revenue – non-current      3,031         2,625    Long-term debt      28,987         16,960    Other non-current liabilities      24,826         20,208                      Total liabilities      120,292         83,451                      Commitments and contingencies       Shareholders’ equity:       Common stock and additional paid-in capital, $0.00001 par value; 12,600,000 shares authorized; 5,866,161 and 6,294,494 shares issued and outstanding, respectively      23,313         19,764    Retained earnings      87,152         104,256    Accumulated other comprehensive income/(loss)      1,082         (471 )                    Total shareholders’ equity      111,547         123,549                      Total liabilities and shareholders’ equity    $ 231,839       $ 207,000                      Read More