How Effectiveness of the Company Determines Its Performance - Coursework Example

Next Plc Contents Summary 3 Task 3 Task 2 4 Task 3a 4 Task 3b 5 Task 3c 6 Task 3d 7 Task 3e 7 Task 4 8 Task 5 8 Task 6 9 Conclusion 10 References 11 Appendices 12 1. Income Statement 12 2. Balance Sheet 13 Summary The company that has been selected for discussion is next Plc which is a British multinational company dealing in footwear, home products and clothing. The importance of efficiency and effectiveness has been explained for evaluating the performance of the business. Since the company deals in clothing and footwear therefore efficiency and effectiveness plays a major role. Financial ratios which is a good indicator for evaluating the financial performance of the company has been evaluated and the necessity of the balance score card for evaluating the non financial performance of the company. Task 1 Efficiency in business: Efficiency in the business can be explained as the utilization of minimum amount of input to generate large amount of output. Companies remain efficient by maintaining low level of inventory and accelerating there collection period. Effectiveness in business: Effectiveness in the business can be defined as the extent of achieving the objectives and solving the targeted problems. Effectiveness is concerned with doing the right things. The difference between efficiency and effectiveness in the business can be explained as efficiency is concerned with doing the things right for providing rapid and consistent result whereas effectiveness in the business is doing the right things for deriving the expected result. Efficiency is considered important for profitability of the business whereas effectiveness is considered important for the growth of the business (Welch, 2011). The effectiveness of Next Plc can be determined through the internal control of the financial, operational perspective and complying with the risk management. Efficiency in case of Next Plc is assessed by determining the quality of the product and the services. Task 2 The three main reason that the business are interested for achieving higher level of efficiency and effectiveness is that it is required by the business to cut or reduce the cost , evaluate the performance of the business and achieve the mission or goals of the company. Efficiency and effectiveness assist the company in attaining the mission of the company by assessing the strength and weakness of the company and also the employees. Maintaining the effectiveness with the utilization of minimum resources will result in the increase in investment for achieving efficiency. It assists the company in making decisions by measuring the performance and improving the quality of the process of decision making. Task 3a Total Asset turnover ratio: The total asset turnover ratio can be calculated by undergoing the following steps Particulars  2014 2013 Total Revenue 3,740,000 3,563,000 Average of total asset 2,019,500 1,874,000 Total Asset turnover ratio = Total Revenue / Average of total asset For the year 2014 = 3,740,000 / 2,019,500 = 1.85 For the year 2013 = 3,563,000 / 1,874,000 = 1.90 The total asset turnover ratio of next plc for the year 2014 is 1.85 and for the year 2013 is 1.90 which indicates that the asset turnover ratio of the company in the year 2014 was sound as compared to the asset turnover ratio for the year 2013. Increase in asset turnover ratio is favourable or the company as it indicates that the company is capable of generating more revenue from its fixed assets and this ratio is also considered as an important element for the du punt analysis. The asset turnover ratio indicates the efficiency of the company. Higher asset turnover ratio implies that the company is more efficient. From the above ratio it signifies that the company was more efficient in 2013 as compared to 2014 (Next plc, 2014). Task 3b Fixed Asset Turnover Ratio: The fixed asset turnover ratio of the company can be determined as Particulars  2014 2013 Total Revenue 3,740,000 3,563,000 Average Fixed asset 3651500 1781500 Fixed Asset Turnover Ratio = Revenue / Average Fixed assets For the year 2014 = 3,740,000 / 3651500 = 42.26 For the year 2013 = 3,563,000 / 1781500 = 40.49 The ratio determines the ability of the company in generating its net sales from its fixed assets. The fixed asset turnover ratio of the company in the year 2014 is 42.26 and it was 40.49 in the year 2013 which indicates that the company has improved its fixed asset turnover from the year 2013 in the year 2014 which indicates that the company is able to generate revenue through the utilization of its fixed assets. The increase in the fixed asset turnover ratio is favourable for the company as it implies that the company has a strong fixed asset base for generating revenue and sales (Higgins, 2008). Task 3c Ratio of revenue to working capital: Particulars  2014 2013 Total Revenue 3,740,000 3,563,000 Working capital 633000 392000 Ratio of revenue to working capital = Revenue / Working capital For the year 2014 = 3,740,000 / 633000 = 5.91 For the year 2013 = 3,563,000 / 392000 = 9.09 The ratio of revenue to the working capital of the company for the year ending 2014 is 5.91 and that of 2013 is 9.09 which indicate that the ratio of revenue to working capital of the company for the year 2014 is less as compared to the ratio to the working capital ratio of 2013. It determines the amount that that is invested for generating revenue for the company (Helferty, 2001). Task 3d Operating expense ratio: Particulars  2014 2013 Total Operating Expenses 3,014,000 2,902,000 Total Revenue 3,014,000 3,563,000 Operating expense ratio = Total operating expense / Total revenue For the year 2014 = 3,014,000 / 3,014,000 = 0.81 For the year 2013 = 2,902,000 / 3,563,000 = 0.81 The above calculation signifies that the operating expense ratio of the company in the year 2013 is same as that in the year 2014 which indicates that the efficiency of the company has not increased in the year 2014 from 2013. Therefore it is suggested that the company is required to focus in generating more profit for meeting or fulfilling its operating expenses. Task 3e Return on investment: Particulars  2014 2013 Net income before tax 701000 637000 Total Assets 2,145,000 1,894,000 Return on investment = Net profit before tax / Net Asset For the year 2014 = 701000 / 2,145,000 = 0.33 For the year 2013 = 637000 / 1,894,000 = 0.34 Return on investment is an important indicator for determining the efficiency of the company. Therefore it is expected that the company should increase its return on investment for maintaining efficiency and therefore it is required to increase the net income of the company and also its current and long term assets. Task 4 Three drawbacks in the application of the financial ratios for determining the performance of the company can be explained as the financial ratio generally do not provide proper base for comparing the financial position between the companies, the other problem is that the ratios are calculated on the basis of the information, data that are based on the book value and it is influenced largely by the historical cost which fails to reflect the current position of the company. And it does not explain the reason for the variation in the ratio with the change in the period. The ratio that is calculated for next Plc only provides us the ratio for the year 2014 and 2013 but does not explains well the reason for the differences and it is also calculated on the basis of historical cost ((Cox & Fardon, 2008). Task 5 Three non financial indicator for measuring company‘s performance are customer, learning and growth and internal process. The learning and growth perspective in the balance score card comprises of the training that is provided to the employees, cultural attitude and it is also associated with the self improvement of the individual and corporate and it is considered as an important factor for the success of the company. The business process perspective of the balance score card determines the internal business process of the company and the customer perspective in the balance card explains and focuses on the satisfaction of the customers in the business. Figure 1: Balance Score card (Source: Kaplan and Norton, 2001) Next Plc is required to consider and apply the balance score card for the strategic planning of the company for attaining the mission and vision of the company Task 6 Comparing the financial ratio of the company for the financial year 2014 and 2013 it has been observed that the financial position of the company has degraded in the year 2014 as compared to the year 2013. The efficiency ratio of the company that are calculated signifies that in the current year the company is decreasing in its efficiency and performance as compared to the previous year .Therefore it is required that the company should focus in its efficiency and effectiveness for generating more revenue and profit and therefore it is suggested that the company is required to adopt the balance score card for evaluating the non financial performance of the company. Conclusion Efficiency and effectiveness of the company determines the performance of the company. The financial condition of the company is evaluated on the basis of the financial ratios which have indicated that the financial condition of the company in 2014 has degraded as compared to 2013. References Cox, D. and Fardon, M., 2008. Management of finance. Worchester: Osborne Books. Helferty, A., 2001. Financial analysis: Tools and techniques. New York: McGraw Hill. Higgins, R., 2008. Analysis for financial management. New Jersey: McGraw Hill. Kaplan, R.S. and Norton, D.P., 2001. Transforming the balanced scorecard from performance measurement to strategic management. Accounting Horizons, pp. 147-160. Next Plc, 2014. Annual report. [pdf]. Available at: < http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/reports-and-results/2014/Next%20AR2014%20web.pdf > [Accessed 17 February 2015]. Welch, R.H., 2011. Church administration: Creating efficiency for effective ministry. New York: B&H Publishing Group. Appendices 1. Income Statement 2. Balance Sheet Read More