Measuring Business Performance - Coursework Example

Measuring Business Performance Table of Contents Introduction 2 Task 1 2 Task 2 3 Task 3 4 a)Total asset turnover ratio 5 b)Fixed asset turnover ratio 5 c)Revenue to working capital ratio 6 d)Operating expense ratio 6 e)Return on investment 7 Task 4 7 Task 5 8 Task 6 9 Conclusion 10 Reference list 11 Bibliography 12 Introduction Organisational development essentially depends on financial and non-financial aspects of a firm and efficiency and effectiveness thereof. Much discussion has been pursued regarding determination of measure for organisational efficiency and effectiveness and it was established that efficiency is quantitative in nature whereas effectiveness is qualitative nature. Organisational efficiency and effectiveness have been defined and distinguished in this paper and their importances have been discussed in organisational context. Besides the theoretical approach, the paper has evaluated efficiency and effectiveness in organisational perspective with respect to Vodafone Plc. In this regard, balance scorecard approach and financial ratio analysis were considered most apposite. Based on the overall performance assessment, specific recommendations have been provided in the paper. Task 1 Organisational effectiveness has been mostly described in terms of examples as the subject is relatively diverse and vague in nature. In plain language, it can be defined as the potential of a corporation to perform a specific function or assignment accurately while undertaking optimum resource utilisation. Business effectiveness essentially denotes overall performance of various underlying operations and processes in terms of production units and quality. In contrast, efficiency measures the extent to which the resources available to an organisation are being optimally used. A number of financial ratios are deployed for estimating organisational efficiency (Robbins, et al., 2013). There is a fine line that distinguishes efficiency from effectiveness as it has already been highlighted that efficiency is quantifiable while effectiveness is difficult to measure in numbers. Putting differently, organisational efficiency can be measured directly while measurement of effectiveness is relatively complex. For instance, sales to employee’s ratio directly represent efficiency of the organisation with respect to employees. However, for determination of effectiveness of employees, their productivity with respect to their idle time will have to be determined. Arguably, organisational effectiveness can be considered as abstract and complex as it is highly subjective in nature. Efficiency, on the other hand, is easy to determine compared to effectiveness because of presence of quantitative character thereof (Lebas, 1995; Robbins, et al., 2013). Task 2 It was observed from previous assessment that an organisation ought to incorporate efficiency and effectiveness in its activities for optimum result. Both the dimensions are crucial for high quality organisational performance. Any of these two dimensions alone cannot support organisational development and survival. It was determined that organisational efficiency is achieved by improving quality of a specific input while organisational effectiveness will be achieved only when various inputs are accurately collaborated. Therefore, effectiveness and efficiency together implies that high quality outputs should be integrated in such a manner that the final output is of exceptional quality (Armstrong and Baron, 2000). Furthermore, business are interested in achieving high level of efficiency and effectiveness because it will improve productivity in quantitative as well as in qualitative terms. In other words, effective strategies and efficient resources will eventually improve profit and optimise operations. Besides, organisational effectiveness and efficiency motivates employees towards better performance, proficiency, productivity and competency, which in turn support organisational growth and development. Lastly, improved efficiency and effectiveness within organisation has significant positive impact on market reputation of a company (Cullen, 1998; Armstrong and Baron, 2000). Task 3 Table 1 (Source: Vodafone, 2014) a) Total asset turnover ratio In general, total asset turnover indicates the proportion of revenue that has been generated by utilising one unit of total asset in monetary terms. It is a measure of firm’s efficiency in terms of appropriate utilisation of resources. However, the effectiveness of this ratio differs among industries as for some industries high asset turnover is considered healthy while in some, moderate asset turnover is considered acceptable. The ratio has been measured for determining the efficiency of Vodafone Plc to maximise its revenue by means of resource optimisation. It was observed that the asset turnover of the corporation has improved from 27.5 percent in 2013 to 31.47% in 2014. However, generalised assessment suggests that the company is still underutilising its resources (White, et al., 2003; Penman, 2007). b) Fixed asset turnover ratio Fixed or non-current assets are long term investments of a firm which are expected to generate benefits in the long run. These assets mainly comprise machinery, building and other long term investments. Fixed asset turnover is important for a firm because unless these assets are utilised optimally, the idleness will generate no return from the investment. This ratio can also be used to determine whether improvement has occurred in asset utilisation. The fixed assets of Vodafone have reduced between 2013 and 2014 yet the performance thereof has improved. Based on the available values, it can be deducted that the effectiveness and efficiency of the company has improved in terms of resource utilisation (White, et al., 2003; Penman, 2007). c) Revenue to working capital ratio Working capital is referred to the residual fund which remains with a firm after meeting its current obligations by using current assets. The working capital is essential for daily transactions and thereby plays an important contribution in revenue generation. The ratio indicates the extent to which working capital is being efficiently utilised for revenue generation. Positive and moderately high ratio is generally preferred for growth purpose. The working capital was determined to be negative for both the years but the situation was observed to improve in 2014. However, the ratio was calculated to be negative for both years. The possible explanation for this can be greater dependency on long term assets instead of short term assets (White, et al., 2003; Penman, 2007). d) Operating expense ratio Operational expense ratio denotes the numerical relationship between a firm’s net revenue and its operational expenses. Operating expenses are mainly incurred for revenue generation and it takes into account sale and administrative expenses. There is no specific measure for this ratio that may indicate if it is good or bad. However, proportionate increase in revenue with respect to expense over a specific period of time is considered healthy. The ratio signifies the expenses that a firm has incurred in its operations for earning a specific amount of revenue. The ratio was observed to increase from 2013 to 2014 for Vodafone. This suggests that the operational expenses of the company have increased proportionately with respect to its revenue (White, et al., 2003; Penman, 2007). e) Return on investment Return on investment reflects capability of a firm in utilising available resources or fund for generating profit. ROI demonstrates the efficiency and effectiveness of a company in making maximum utilisation of shareholders’ investment. Poor returns generally discourage investors and influence them to pull out their investment. On the other hand, good returns motivate and invite investors for investing purpose. The profit before tax was observed to be negative for Vodafone in 2013 and 2014 as a result of exceptionally high operating expenses. Consequently, the ratio is negative for both years. Such a situation can be considered critical for the company and its shareholders. However, it was observed in the balance sheet that the company has reported positive net profit in 2014 as a result of tax income and significant profit from discontinued operations (White, et al., 2003; Penman, 2007). Task 4 Financial ratios are of significant importance to various stakeholders of an organisation such as investors, creditors and financial institution but ratios are not absolutely accurate measure of business performance because of certain drawbacks. These drawbacks are listed as follows: a) Ratio is essentially a quantitative relationship between two financial parameter derived from financial statements. As result, this technique is not useful while addressing issues that are qualitative in nature such as motivation, customer service and product quality. b) Ratio analysis can often prove misleading while comparing performance for two or more time periods when variation in financial data occurs as a result of external factors such as inflation, fluctuation in interest rate and other systematic risks. Similarly, ratio analysis and comparison between two or more companies belonging to dissimilar industries can prove to be ineffective as different industries are governed by different regulations and have unalike market structure. c) One of the most highlighted drawbacks of ratio analysis is its complete dependence on past data. The analysis does not provide any support in future prediction or forecasting activities in an organisation (White, et al., 2003). Task 5 Based on Kaplan and Norton’s balanced scorecard approach, the paper discusses three important non-financial metrics for evaluating Vodafone’s performance (Kaplan, 2008; Vodafone, 2014). Market share: The mobile market share of Vodafone has declined from 9 out of 17 markets in 2013 to 7 out of 17 markets in 2014. The company justified that it is currently focussing on various emerging markets in South Africa, Turkey and India; as a result of which, the company lost significant market in Europe. Employee engagement: Employee engagement and personnel development is considered significantly important at Vodafone. The company has developed an inclusive and diverse culture for greater employee engagement and motivation. Vodafone offers various short term incentives to its employees for encouraging better performance and competency. Corporate governance: Vodafone rigorously support corporate governance code of the United Kingdom. The firm is committed towards organisational ethics, environmental sustainability, health, and safety at workplace. The company has adopted measures to minimise carbon emission and increase energy conservation. Task 6 The financial aspects of Vodafone reflect mixed performance of the company. The company was observed to earn moderate level of revenue but the operating expenses of the company was determined to be exceptionally high resulting to operating loss for the company. It was also gathered that Vodafone is underutilising its resources and assets and can improve its revenue by optimising its resource utilisation. The company can face fund crisis in short run due to high current liabilities. Vodafone should take measures to resolve problems related to its working capital and profit position. The non-financial metrics of Vodafone were observed to be well-positioned. The market for Vodafone is improving in emerging economies but some challenges do exist in European countries. The firm has adopted comprehensive measures for employee engagement, personnel development and sustainability (Vodafone, 2014). Conclusion Vodafone is a renowned name in the global communication sector and is known for high quality mobile based services in various developing and developed countries. The paper undertook ratio analysis and balanced scorecard assessment for evaluating financial and nonfinancial performance of the company. The financial condition of Vodafone is experiencing a turbulent phase and it requires restructuring for expecting long term financial stability. The non-financial metrics indicates that the firm is committed towards society and sustainability abides by corporate governance code of the UK government. Reference list Armstrong, M. and Baron, A., 2000. Performance management. Human resource management, pp. 69-84. Cullen, R., 1998. Does performance measurement improve organisational effectiveness? A post-modern analysis. Northumbria: Northumbria international conference. Kaplan, R. S., 2008. Conceptual foundations of the balanced scorecard. Handbooks of Management Accounting Research, 3, pp. 1253-1269. Lebas, M. J., 1995. Performance measurement and performance management. International journal of production economics, 41(1), pp. 23-35. Penman, S. H., 2007. Financial statement analysis and security valuation. New York: McGraw-Hill. Robbins, S., Judge, T. A., Millett, B. and Boyle, M., 2013. Organisational behaviour. Australia: Pearson Higher Education. Vodafone, 2014. Financial report 2014. [pdf] Vodafone. Available at: [accessed 28 February 2015]. White, G. I., Sondhi, A. C., Fried, D. and Aiello, E., 2003. The analysis and use of financial statements. New York: Wiley. Bibliography Alexander, C., 2001. Market models: a guide to financial data analysis. New Jersey: John Wiley & Sons. Subramanyam, K. R., Wild, J. J. and Halsey, R. F., 2009. Financial statement analysis. Boston, MA: McGraw Hill. 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