Measuring Business Performance - Coursework Example

Accounting Measuring Business Performance Registration: Module Leader: Workshop Due Introduction Efficiency in business is reflected in profitability, while effectiveness is captured in the growth of the business, and these two can be measured through either financial measures or non financial measures. This paper will explore these concepts utilizing different examples and employing the financial results of Friends Life to produce a good result. Task 1 Efficiency and effectiveness are two parts that must coexist together for any sound business to grow and consistently make favourable profit. According to Hewing (2014), efficiency in business is defined more as internal part performance often shown to be inclined towards input-output relationship. In fact efficiency can metrically be measured using cycle time and capacity utilization, and in short efficiency refers to the time it takes a process or a person to achieve a given result. On the other hand, effectiveness shows the target results are achieved, and in short it is the level of results from the employees or process within a system. In an organisation, employees who achieve their targets in their respective departments for instance employee A achieves a set target of 10, 000 unit sales is said to be effective. Conversely, an employee who achieves the target within the shortest time possible is efficient. Task 2 Efficiency and effectiveness are very important components of the business function, and there a number of reasons why businesses are interested in achieving higher levels of efficiency and effectiveness. 1. Effectiveness and efficiency assists businesses in setting up of organizational goals, and hence they important in business because they are the ingredients the business attains its goals, and efficiency corresponds to time goals, whereas effectiveness corresponds to results. 2. In the present face of intense competition brought about by globalization, businesses must employ tools that assist in profitability. This implies that reducing costs and increasing revenue, and a business that employs effective methods shall surely make higher returns. 3. Efficiency and effectiveness contribute positively to the business as it helps in aligning the organizational structure towards good communication and cohesiveness, and through the principle of transitivity, this will benefit the customers, who in turn become loyal and retained. Task 3 The company selected for the purpose of task three is Friends Life, and its shares are being traded publicly traded at the London Stock Exchange. The annual results for 2013 and 2012 financial year are located at the appendix section of this paper. a. The total assets turnover ratio This is the amount of sales generated per dollar of assets, and it is calculated as the level of sales/ revenue divided by the total asset. 2013 2012 Revenue 10, 956, 000 11, 199, 000 Total Assets 130, 091, 000 127, 739, 000 Total assets turnover 0.084218 0.087671 b. Fixed assets turnover This is the ratio of assets to fixed assets, and it measures a company’s ability to generate sales from its fixed assets. The above ratios show that there was a reduction in effectiveness from the year 2012 to 2013. 2013 2012 Revenue 10, 956, 000 11, 199, 000 Fixed Assets 127, 122, 000 124, 448, 000 Fixed assets turnover 0.086185 0.089989 c. Ratio of revenue to working capital represents the reduction of capital to the generation of revenue over a period, as a result it is sales over working capital, and working capital is the difference between current assets and current liabilities. 2013 2012 Revenue R 10, 956, 000 11, 199, 000 Current Assets 13, 925, 000 14, 577, 000 Current Liabilities 16, 642, 000 15, 941, 000 Working Capital WC -2717000 -1364000 Revenue to working capital ratio, R/WC -4.032339 -8.21041 The negative value shows that systems are inefficient, but at least the system improved from 2012 to 2013. d. Operating expense ratio is the measure of what it costs to operate a piece of fixed assets compared to the income that flows from the property, hence it is the operating expense divided by gross operating income. 2013 2012 Operating expense 10, 328, 000 10, 520, 000 Operating Income 628, 000 679, 000 Operating expense ratio 16.44586 15.49337 The cost of operating the business considerably rose from 2012 to 2013, and from a ratio the ratios shown. e. Return on Investment is the performance measures used to analyse the efficiency of an investment or even to compare the efficiency of certain business investments, and to calculate the ration, returns is divided by the cost of the investment. Return on investment can be calculated on the net profit over investment, and investment is calculated from the stock assed to the market outstanding and claims. 2013 2012 Net Profit 204, 000 (72, 000) Investment 4223000 4225000 ROI 0.048307 -0.017041 The ROI for the company improved from 2012 to 2013, showing increased productivity and hence more efficiency and effectiveness. Task 4 Financial ratios are very important analytical tools in business as they provide a nip into their performance over a given period of time (Lee, 2006). However, despite this obvious benefit from the use of ratios in business, there are other underlying drawbacks: 1. Inflation is not normally factored in when analyzing ratios from two different periods of time, and it can greatly affect a company’s annual reports, more so transactions that could have an influence on the profit, and expenses. Hence, the ratio analysis of a single company in a given time period or even a comparative analysis of different organisations over different time periods must be subjected to different interpretations and judgments. 2. Financial ratios can be useless if they are used in intra company comparability if the policies of one company are different from the other, or if the companies being compared follow different accounting standards, and hence different reporting styles (Duhaime, Stimpert & Chesley, 2011). 3. Moreover, these financial ratios hardly give the complete picture quantitatively. For example in industrial investments can provide a low ratio compared to investment in the service industry, yet the income streams from the industrial industry might last longer. Task 5 The Kaplan and Norton’s proposed non financial measures of performance may include the following; market share, employee satisfaction and customer centered measures. Market share of a company’s brand represent the growth of a company’s visibility and may lead to more revenue, profit or even both (Maher, Stickney & Weil, 2008). Well this share may be portrayed within the books of account, but the accurate measure of market share may rests with market research. An improving market share for a brand also positively reflects on the other performances such as customer services or even employee satisfaction, but note that this is not always the case. For instances company A’s market share improves from 30% to 40% in represent an improved performance as the rivals’ shares shrink in converse. Employee satisfaction is an important measure of performance, and this metric can be measured through improved sales level (Chapman, Hopwood & Shields, 2007). Other forms of determining employee satisfaction include customer survey, employee survey, and amongst others. This metric is very important in aligning company performance to the overall company objectives and goals. Employees are the backbone of any organisation, and their contributions are directly reflected in different ways in the company. Customer centered measures are another measures of organisational performance dissimilar from the traditional financial measures. Customer satisfaction as a subset of customer centered measures can be measured in different ways for instance a short survey (Meyer, 2002). Similarly, this measure can also be reflected in the growth of revenue/profit, market share amongst others. To suggest that customer satisfaction is correlated to sales/profit or market is just a hypothetical pointer, and should not be taken as an assertion that the variables have actually been subjected to an empirical research. Task 6 It is quite evident that the financial ratios paint a different picture from the actual results shown on the reports, both the balance sheet and the income statement (Asante & Strategy, nd). The ratio shows that in the year 2012 the assets produced a net loss yet the following an increase in negligible value of shares produced a profit. Perhaps, the use of non financial performance measures could have painted the true position of the company in both the year 2012 and the year 2013. Conclusion This paper explored efficiency and effectiveness in business, and the different financial ratios used to quantify these concepts. In addition, this paper discussed three non financial measures of business performance to a business: customer centered employee satisfaction and market share measures. References Asante, T., & Strategy, P. L. I. nd. Key Financial Metrics of a Good Business. Chapman, C. S., Hopwood, A. G., & Shields, M. D. 2007. Handbook of management accounting research. Amsterdam, Elsevier. Duhaime, I. M., Stimpert, J. L., & Chesley, J. A. 2011. Strategic thinking: todays business imperative. New York, Routledge. Hewing, M. 2014. Business Process Blueprinting A Method for Customer-Oriented Business Process Modeling. Wiesbaden, Imprint: Springer Gabler. Lee, T. A. 2006. Financial reporting and corporate governance. Chichester, England, John Wiley & Sons. Maher, M., Stickney, C. P., & Weil, R. L. 2008. Managerial accounting: an introduction to Concepts, methods, and uses. Mason, OH, Thomson/South-Western. Meyer, M. W. 2002. Rethinking performance measurement beyond the balanced scorecard. Cambridge, UK, Cambridge University Press.  Appendix Annual Financial Statement for the Years 2013 and 2012 of Friend Life Company Income Statement View: Annual Data | Quarterly Data Period Ending Dec 31, 2013 Dec 31, 2012 Total Revenue 10,956,000   11,199,000   Cost of Revenue 9,038,000   9,275,000   Gross Profit 1,918,000   1,924,000   Research Development -   -   Selling General and Administrative -   -   Non Recurring -   -   Others -   -   Total Operating Expenses 10,328,000   10,520,000   Operating Income or Loss 628,000   679,000   Total Other Income/Expenses Net -   -   Earnings Before Interest And Taxes 628,000   679,000   Interest Expense (142,000) (157,000) Income Before Tax -   -   Income Tax Expense 134,000   107,000   Minority Interest (31,000) (31,000) Net Income From Continuing Ops 235,000   (41,000) Discontinued Operations -   -   Extraordinary Items -   -   Effect Of Accounting Changes -   -   Other Items -   -   Net Income 204,000   (72,000) Preferred Stock And Other Adjustments -   -   Balance Sheet View: Annual Data | Quarterly Data in thousands Period Ending Dec 31, 2013 Dec 31, 2012 Cash And Cash Equivalents 9,690,000   9,449,000   Short Term Investments -   -   Net Receivables 474,000   497,000   Inventory -   -   Other Current Assets 2,969,000   3,291,000   Total Current Assets 13,925,000   14,577,000   Long Term Investments 108,795,000   105,176,000   Property Plant and Equipment -   -   Goodwill -   -   Intangible Assets -   -   Accumulated Amortization -   -   Other Assets -   -   Deferred Long Term Asset Charges -   -   Total Assets 130,091,000   127,739,000   Accounts Payable 4,847,000   5,169,000   Short/Current Long Term Debt 1,387,000   1,257,000   Other Current Liabilities 11,559,000   10,521,000   Total Current Liabilities 16,642,000   15,941,000   Long Term Debt 1,355,000   1,192,000   Other Liabilities -   -   Deferred Long Term Liability Charges -   -   Minority Interest -   -   Negative Goodwill -   -   Total Liabilities 124,542,000   122,041,000   Misc Stocks Options Warrants -   -   Redeemable Preferred Stock -   -   Preferred Stock -   -   Common Stock 4,223,000   4,225,000   Retained Earnings 1,032,000   1,187,000   Treasury Stock (26,000) (35,000) Capital Surplus -   -   Other Stockholder Equity -   -   Total Stockholder Equity -   -   Net Tangible Assets -   -   Adapted from Yahoo Finance Read More