Benefits of Financial Analysis - Coursework Example

Foundation Accounting Assignment - September intake Measuring Business Performance and Section # of Name> Table of Contents................................................................................................................... 1 Introduction………………….................................................................................................2 Task 1 ..................................................................................................................................... 3 Task 2 ..................................................................................................................................... 4 Task 3 ..................................................................................................................................... 4 Task 4 ..................................................................................................................................... 6 Task 5 ......................................................................................................................................6 Task 6 ......................................................................................................................................7 Conclusion…………………………………………………………………………………....8 Introduction Differentiating between efficiency and effectiveness is very important topic. Both terms are different and are of great importance for a business. Further determining the reasons behind higher levels of efficiency and effectiveness is among area of interest for business managers. Financial analysis of companies using accounting ratios has always been a good way to judge the financial standing and performance of a company. There are many benefits of financial analysis using accounting ratios but there are several drawbacks that must also be considered. Task 1 Answer: Both concepts are inter-related but there is a difference between them. It is important for business managers to understand the difference between efficiency and effectiveness. There is a minor difference between efficiency and effectiveness. Following is the definition and difference between efficiency and effectiveness: Efficiency: With respect to workplace it r refers to the time to perform a work with less time and more accuracy. For example, if a person writes one page with accuracy in 20 minutes and his counterpart writes the same page with same accuracy in half an hour. Then the person that takes just 20 minutes to write a page with the same accuracy that his colleague writes in 30 minutes is more efficient. Effectiveness: with respect to workplace it refers the level of results from the work of employees or managers. In effectiveness the emphasis is on quality rather than on time. In businesses, sometimes quality is more important than time. So in such case it does not matter if someone finishes a work in 20 minutes or 30 minutes. It is the effectiveness of the results that matter. Difference: Efficiency is a work done per unit time whereas, effectiveness is a work done over a comparatively more period of time. Efficiency is based on quality of work and time taken to complete that work. On the other hand, effectiveness is more focused on quality and less focused on the time. Task 2 Answer: There is no denying of the fact that all businesses are interested in achieving higher levels of efficiency and effectiveness. There are numerous reasons behind this interest of businesses. Following are main three reasons behind this: 1. Every business wants to increase its profits and it is important to increase the efficiency and effectiveness of employees and business processes to streamline the use of resources. 2. The quest of higher levels of efficiency and effectiveness make a sense of responsibility in employees and merit for promotion and benefits of employees are determined through efficiency and effectiveness. 3. Businesses are interested in higher levels of efficiency and effectiveness to achieve best out of available resource thereby achieving short and long term goals of business. Task 3 Answer a: For conducting financial analysis using accounting ratios, Visa Inc. has been selected. Visa Inc. is a global financial services company and is market leader in payment transfer solutions. Its financial statements have been taken from its website. The website link to financial statements of 2013 and 2014 are given in Appendix-1. Following is the result of the asset turnover ratio analysis, Total Asset Turnover Ratio is 0.26 for 2012, 0.327 for 2013 and 0.329 for 2014. It measures the sales revenue per total assets. There are no set standards but higher the total assets turnover ratio, the best. Visa Inc. total asset turnover ratio analysis shows it is in good condition. Answer b: Fixed assets turnover ratio = Revenue / Average Fixed Assets Fixed assets turnover ratio for 2014 is 0.44 which a good sign for Visa Inc. Answer c: Ratio of revenue to working capital = Revenue / Working capital Ratio of revenue to working capital for 2013 is 3.377, and for 2014 is 3.57. These figures are also good and show good performance of the company. Answer d: Operating expense ratio = Operating Expenses / Revenue Operating expenses ratio for 2012 is 0.289, for 2013 is 0.3854, and for 2014 is 0.3586. this shows a growth in this ratio. And these figures for operating expenses ratio are good for a company. Answer e: Return on investment = Net Profit before Tax / Net Total Assets Return on Investment: It is 5.36% for 2012, 13.85% for 2013 and 14.10% for 2014. The higher the return of investment the higher is the performance of the company. So in the year 2012, the performance of the company is not good. It has performed well in the years 2013 and 2014 in terms of return on investment. All ratios of Visa Inc. show that it is in a good financial condition. Further we can draw conclusion from its financial analysis using accounting ratios that its performance is also good. That is why it is market leader around the world. But it still needs improvements on assets and liability sides. Revenues are good at the moment but due to emergence of rivals like Union Pay and Master Card, its revenue can decrease in the future. Task 4 Answer: There are great benefits of conducting financial analysis using accounting ratios but nevertheless there are some drawbacks in the use of financial ratios as indicator of a company’s performance overtime. So it is important to discuss those drawbacks of conducting financial ratios analysis. Here are three main drawbacks: 1. Ratios only tell weak and strong points, ratios do not guide how to resolve an issue and weaknesses. We should not base all future decision on the basis of ratios. 2. Another limitation emerges when we compare particular set of ratios of one business with another business or industry averages. 3. The presence of inflation can make a ration analysis good or bad. This can be done away by calculating future inflation at the time of financial analysis. Task 5 Answer: As per Kaplan and Norton’s (1996) balanced score card, three non-financial methods for assessing a company’s performance are: 1. The performance of a company can be assessed by taking feedback from customers and other stakeholders for quality, timeliness and service delivery. 2. The performance of a company can be assessed by evaluating all internal business processes, quality systems and information systems. 3. The performance of a company can be assessed by running self assessment process for improvements. Self assessment of strategic and tactical analysis. Task 6 Answer: Effectiveness and efficiency are two similar concepts but there is a difference between both terms. Former is more related to quality of work whereas; former is related to time consumed and quality of work. Businesses are concerned with increasing the levels of efficiency and effectiveness in the organization to increase the profits, productivity and right utilization of resources. Financial analysis using accounting ratios is a good way to judge the financial position and performance of a company but there are a few drawbacks of solely relying on results of financial analysis because often comparing with other companies and industry averages renders wrong results. There are some other non-financial ways to judge the performance of a company in the light of Kaplan and Norton’s (1996) balanced score card. These methods are: taking feedback from customers; checking all business processes for anomalies; and by running assessment processes. Visa Inc. was taken for financial analysis. Results of financial analysis show that it is in a good financial condition. Conclusion At the end, we can summarize all analysis and discussion of the paper by interpreting a conclusion based on the whole discussion. Efficiency and effectiveness are important concepts and considered by management of every business. Financial analysis of a company is also as it tells about the weaknesses and strengths of a business. On the other hand, there are some drawbacks of financial analysis when it comes to check the performance of a business. Visa Inc. is taken for financial analysis. From the financial analysis using Visa Inc. it is evident that Visa Inc. is in strong financial position. References and Bibliography Kaplan and Norton’s (1996) Conceptual Foundations of the Balanced Scorecard, Harvard Business Review, http://www.hbs.edu/faculty/Publication%20Files/10-074.pdf Arthurs J. Keown, John D. Martin, J. William Petty, David F. Scott, Jr. (2005) Financial Management: Principles and Applications, 10th Edition, Pearson Education Inc. Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello (2011) Financial Managerial Accounting, 16th Edition. McGraw-Hill/Irwin Andy Neely (2007) Business Performance Measurement: Unifying Theory and Integrating Practice, Cambridge University Press, http://ebooks.cambridge.org/ebook.jsf?bid=CBO9780511488481 2013 and 2014 Annual Report of Visa Inc, 2013:http://investor.visa.com/files/doc_downloads/annual%20meeting/2014/817762_BMK1.pdf 2014:http://investor.visa.com/files/doc_downloads/annual%20meeting/Visa%20Annual%20Report%202013%20final%20website.pdf www.ratio-analysis.org. Limitations of Ration Analysis, http://ratio-analysis.org/limitations-of-financial-ratios.php Appendix 2014 Annual Report of Visa Inc http://investor.visa.com/files/doc_downloads/annual%20meeting/2014/817762_BMK1.pdf 2013 Annual Report of Visa Inc http://investor.visa.com/files/doc_downloads/annual%20meeting/Visa%20Annual%20Report%202013%20final%20website.pdf Read More