Annual Report versus Value Added Statement - Coursework Example

Understanding the Organization- Annual Report versus Value Added ment An organization has various faces. There are times when it is recognized for its market performance. On other occasions, the productive performance is reviewed and discussed. Yet other occasions call for a viewpoint on the financial performance. Productive and financial performance are two critical areas which contribute to market performance, both directly and indirectly. Market performance of an organization or firm is a measurement of the efforts made in the direction of price, investment, decision making with regard to their product promotion, policies governing business conduct, which impacts the status of the organization as an economic entity. Market performance is a direct outcome of these organizational inputs. We all understand that a market is defines as a place where buyers and sellers meet. Productive performance iterates best practices for best results in the workplace, which lead to better productive performance. It is impacted positively by a progressive workplace culture, deployment of optimum technology, stable market conditions, steady rate of growth, low levels of attrition, demand supply equilibrium, relevant people skills, clarity on roles and job profiles. Financial performance simply outlines and assesses how well a firm or organization can use up assets from its primary mode and build enormous value add or generate profits or secure a healthy positive bottom line, all of which indicate the viability of the organization, though not its health or value distribution. When total income is more than total expenditure, we have reason to believe that the firm can stay in business. In fact, the current recessionary tendencies of markets the world over indicate that financial performance is the ultimate litmus test for any entrepreneurial entity. The annual report and accounts of any company or firm or organization is the best document to provide an overview of all the three performance criteria. The annual report is a statement of the financial performance of the firm, explained with the help of details on components like marketing performance and productive performance including ownership pattern details, corporate entity, profit and loss numbers, employee details, vision and mission statements, corporate intent and procedures, updates on market capitalization leading to shareholder wealth creation, rewards. Often, these details are used to leverage the firm’s positives, while covering up the negatives, though the case may actually be different. The inputs in an annual report are often subject to manipulations; facts may not be presented in their true context and may misrepresent the data, and may still be technically correct facts. Inferences drawn can be many; and often tampered in the interest of the firm. There is another method of reckoning accounts, which is not to be seen in the annual reports or balance sheets. It is through a ‘Value Added Statement’. ‘Value Added’ is the difference between the cost of materials and the price which customers are ready to pay for the finished product. This difference accrues to the firm who in turn, spends the money on employee remuneration and welfare, interest on capital, taxes to the Government and any such internal expense which does not come under the direct purview of input costs, but which enhances product sales. In short, ‘Value Added’ represents the wealth created by the firm’s own efforts through application of its labour force and resources. It is a good measure of the size of the firm. In fact, it is a better measure than the annual report. There is an Economic Value Add (EVA) and a Market Value Add (MVA). The EVA is the financial performance measure to assess true economic profit after allowing the opportunity cost of all capital employed. Firms earning higher EVAs are more generous to shareholders. Let us take a general example- If value added is 4 units of currency, and the firm pays approx the same as wages, overheads, dividends, taxes, the net value added is low. On the other hand, if value added is 4, and the total outgoing after payment to input costs is just 2, then value added is 2, or higher. It is understood that profit is sales revenue minus costs. If the net earnings or revenue outcome is more than costs, a firm is in profit, and if the net revenue is less than costs, then the firm has incurred a loss. In comparison, the Value Added Statement serves to present the facts better. Though historically, it is not a part of any firm’s balance sheet or annual report or statement of accounts, the Value Added Statement is a powerful base for judging the wellness of a firm or organization. A Value Added Statement of a firm can be simply defined as the difference between the revenue earned by a firm in a given time period less the cost of purchased materials and services during that period. Firms add value by changing the form of goods (e.g .by processing or assembling them) or by changing their location (e.g. moving them) or by changing their availability (retailing for example). A Value Added Statement shows how the value added (revenue generated) has been distributed among a firm’s employees, shareholders, tax to Government, other stakeholders, and tells us how much remains as value add. When an organization acquires goods and services, it spends X amount. The value added statement shows how much more the firm has spent over and above the cost of the inputs X to generate sales. We now come to the eternal question as in how different is it from a P & L account? And then follows the next logical query, as in, which one is better? A P & L account states all the incomes and expenses of a firm. It is value at a point in time, not in real time. It also includes extraordinary income but the big picture that emerges is one of just some amount of money coming in as profits or going out as loss. A Value Added Statement states the difference between input and output of the firm- it is more relevant when we want to study the health of an organization or firm since all the variables are at actual values- shareholder payouts indicating market capitalization, asset value indicating net worth, dividend as paid to stakeholders, etc. After considering employee remuneration, shareholder payments, tax, etc paid from the sales revenues, some amount still remains- that is the Value Add distribution which is so important to study the health of an organization. The larger the amount, the better the indication of health and cost efficiencies of that organization. Despite its relevance in organizational health assessment, Value Added Statement is usually not part of any annual report or balance sheet. It is, however a respected document since it measures wealth as value add not as profits. Also, it is not as easy to manipulate as a P & L account. The annual report is useful in analysing and understanding the market, productive and financial performance of a firm to the extent that it gives a broad overview of the financial viability of the firm. It however, gets limited when we need to understand about expenses incurred or cash outflow on qualitative organizational HR interventions, financial liabilities as against debt free status, shareholder wealth creation, and finally the net value add that gets carried over to the next fiscal. “A single annual report may contain only modest amounts of disclosure...the researcher should look for the rationales given for both good and bad financial results; these should expose some of the critical success factors in the industry...It is also possible to gain some insights into how companies are organized, the flow of production, and numerous other factors from reading between the lines in a series of annual reports from the same company”.(Porter. 1980.Page 371). References Porter, Michael, E. Competitive Strategy: Techniques for Analyzing Industries and Competitors Published by The Free Press. A Division of Macmillan Publishing Co. Inc.1980. Read More