Financial Accounting - Business Performance Analysis

Table of CONTENTS

Introduction

Description

Actualization

General Analysis

Discussion

Conclusion

References

INTRODUCTION

Companies in recent years are been challenge by their owners due recent problems that need to be address. It is very important for investors to see corporate bodies facing financial difficulties and the principle behind businesses that the corporate entities facing the market. Some investors who hold their investment in the form of small amount of shares will focus their attention to just earnings, their investment yield through dividends and will as individuals not pay more attention to the overall corporate issues. Another investor group is the institutional investors that are interested in pursuing vigorous corporate objectives in ensuring that companies that they hold their investments are doing well and adhering to good corporate governance principle and being socially responsible and also comply with environmental issues that will boost their investment. It is apparent that a good number of people commit their investment into companies that follows these principles. Potential institutional investors always want to know the stock market and the company that are performing well in the market system as investors are keen in seeing that stock market are involve in undertaken economic issues that will help boost the emerging market. Investors also want to see companies reacting or being free from political issues that will affect their business performances, as companies need to take steps that will allow any cultural disputes to enable them perform creditably.

Investors are keen in seeing that their businesses are performing creditably so that when share prices are favorable their investment will automatically goes high or increase by way of earning higher dividends or if the reverse occur companies investors may turn to sell their stake in the business. This potential information is always vital to investors as they act whether share prices are in favor of them or not. This means that company’s performance is very crucial to investors since they rely on sentimental in the economy whether good or bad will have an impact to their businesses. It is therefore important for companies to be analyzed by way of ratios and other non-financial indicators to access and assist company’s investors in accessing the performance before any commitment into that company. As owners and directors of companies it is good to use ratios to judge how the business or company is performing but it is also noted that not only investors that are interested or keen in accessing the performance of a business but also comparing other companies performances. Business performance analysis can be assessed by company’s management through the use of financial indicators such as Profitability, Liquidity and Solvency ratios if performed can indicates whether a company is growing or not. Another performance indicator is the Non-financial indicators such as customer service, inventory, changes in levels of production over two years and efficiency of use of assets in producing goods. Also a Balanced Score card is another performance measure that a business can use and the success of any business or company depends upon its vision and strategy that it has set. Therefore a company dealing with groceries or a super market, its vision should be seen in that direction than a manufacturing firm; this indicates that there are so many ways of measuring performance in business so investors are encourage doing or consulting before investing.

Description:

There are various modules that can be used in assessing company’s performance

Portfolio Risk;

A measurement in a banking industry can be accessed through the use of portfolio risk in accessing the viability of the company whether management are able to perform proper risk profile before granting loans to businesses and individuals who might not be able to repay back and if the ratio is high in terms of debts recoverability it is not worth investing in such a business. Banking sector need a lot more prudence in granting loans and debt recovery that takes more days or more credit time is not a good quality portfolio risk and might imply a high ratio of unrecovered debts. Bank officials carefully understudy their debt recovery level and if it is high they turn round to refinanced their loans thereby trying to decrease their portfolio risk which does not do away the total level of risk that they face, so it is important for investors to note and advised themselves before investing into such portfolio.

Measurement of Quality and Service

Customers often differentiate between two firms on the basis of quality and service where costs of production do not vary. They are crucial factors or consideration in the measurement of company performance using quality performance measures such as the number of complaints from customers, the number of faulty product referred, the number of product rejected by quality control and the number of products requiring repair within the warranty period. So an investor in firms that uses these criteria should be mindful of any high level of customer’s complaints and how they are handled by management before undertaken any investments.

Service Performance

This is where firms are measured using the delivery time to customer from the time an order is received, time taken to response to customers complaints and back up provided in terms of instructions customer help line. An improved company reputation of service will be compared with budget performance and target to assess whether the company’s service performance was better or worse than the target performance. Quality and service are objectively measurable; it is important for company’s to build up a reputation for such activities. An investor under this category should be mindful as quality is paramount in service centre and any uncompromised will jeopardize the company if performance level is not satisfactorily done to achieve the needed target so that it can translate into good dividend to shareholders.

Critical Success Factors

These are longer term objectives representing aims which the organization cannot meet in the short-term but which it would like to attained in the fullness of time; for example a manufacturing company would have the following as its short term objectives; to provide quality products with a good back-up service, to make a large enough profit to satisfy investors with dividend and increase share value and finally to avoid cash flow problems and to maximize market share.

In order for a full, reasoned assessment of performance measures to be made information provided need to be accurate free from bias and provided in full. Such performance measures need to be looked at from the point of view of attainment of short-term goals. All performance measures can be manipulated to satisfy the manager’s aims without fulfilling the company’s aims.

Financial Indicators

There are various ways of performing these indicators as they can be derived through the following;

1. Income statement: This statement shows the income and expenses incurred by the company in addition to other related expense such as interest and taxes that they incurred.
2. Balance sheet: A statement that is always prepared during year end of a company; this is where assets are classified in their respective groupings such as fixed assets and Current assets. It is also where the shareholders worth with any loans or liabilities that the company contract are shown.
3. Cash Flow Statement: This statement shows how liquid a company is by indicating the true component of the entity cash making up opening and closing balances with any movement during the year. But this statement can be prepared at any given time frame to show the true reflection of the company liquidity position. This statement also indicates areas like; Operating, Investment and Financing activities that the company runs.

INCOME STATEMENT

This is a statement that assists users or managers to know what the company generates as revenue within one accounting period and other related associated cost known as expenses. If revenue exceed expenses then a profit is made or a loss if the reverse occurs.

Revenue is an inflow or the use of business assets of a company or an entity that brings in an income to run the business or an income from running a service for the entity or other related activities that make up the entities income.

Expenses- These are outflows that an entity incurs for the running of the business without these expenses there will be no production.

Turnover/Sales – This is the basis of a company generating an income to or for the company; this sales is normally not only cash but included the credit goods sold for and revenue yet to get at a later date.

Cost of sales- This is the total cost of direct expenses incur during sales or production. Usually these costs are cost that is actually incurred for the purposes of trading activities.

Other Operating Expense- These is other additional expenses incur before a particular production can be completed.

Gross Profit- This is a profit between Turnover and cost of goods sold which will allow or permit other expenses to be charged in order to allow an entity to determine its net income.

Other Income- Normally it is that income that does not relates directly from production activity but any income that accrue from the normal operation.

Operating Profit- Is that profits that a company makes, after carefully considering all its expenses on the trading activities and any other associated cost.

Profit before Tax- This is that profit element where all associated cost has been incurred except tax which the company will now apply the corporation tax percentage on it.

Retained Earnings- This is the portion of profit after all direct and indirect cost incurred deducted. It is from this profit portion that the owners of the company will now at a meeting with directors decides whether dividend can be declared or not and the balance carried over to the following accounting year through the balance sheet. This profit element is part of the equity shareholders worth.