Financial Statements and Their Importance
According to Scarborough (2016) financial statements are important tools to help owners or a board of directors to make decisions pertaining a business. Defined, financial statements are documents written to show the financial activities of an organization through the balance sheets, income statements, the cash flow statements and statement of retained earnings (Gitman, Juchau and Flanagan, 2015). Moreover, the financial statements of a company reveal the profitability of the business and thus the financial performance of the organization. ETCO Engineering Ltd has been performing well over the years since its establishment but due to the recent change in the top management, the performance of the company has progressively declined. An analysis of the financial statements from the year 2015 to date has been conducted and the following report shows the results and the possible recommendations and actions to revive the booming business once again. Tjader et al., (2014) observe that when financial statements are accurately prepared, managers and directors of an organization can use the data to accurately predict the future performance of the different sectors of the business, as well as, arrive at reasonable decisions that will perfectly position the organization back into profitability.
Analysis of Financial Statements
The financial statements extracted from ETCO Engineering Ltd for the year 2014-2016 show a drastic decrease in total revenue, net profits, and retained earnings despite an increase in the amount of capital employed. The data trend shows that the company has been operating on a loss, which may not be sustainable for such a business in a competitive industry. According to Flora (2017) total revenues refers to a summation of receipts from the sale of goods or services and its formula is given as . On the other hand, the net profits refers to the actual profits gained less the cost of sales and deductible tax amount () (Hirschey, 2016). The retained earnings of a company refer to the total profits remaining after deducting all dividends and any other distributions made to investors.
Importance of Accounting Ratios
According to Christensen et al., (2016) accounting ratios are important as they help an organization to gauge its performance with the recommended industry performance. Due to the comparative involvement of the industry performance and entity performance, the financial and accounting ratios give business owners to determine their business efficiency (Collier, 2015). Some examples of the most important accounting ratios for a production firm such as ETCO Engineering Ltd include, debt to equity ratio, shareholders equity, current ratio, current liabilities, quick ratio, return on equity, financial ratios and net profit margin. Operational and Human resource data reveal pertinent issues that may have contributed to the decline in profitability or performance of ETCO Engineering ltd.
Effects of Defective Products and Absenteeism on Performance
According to Sarkar et al., (2014) when an organization produces a high number of defective products, the cost of production increases while the level of sales decreases. In the Operation and Human resource data from ETCO, the average number of production managers over the years has continuously decreased from 50 to 45. Similarly, the level of employee absenteeism has progressively increased from 2.3% in 2014 to 4.9% by 2016. Due to a decreased number of production managers within the organization, and an overwhelming increase in the level of absenteeism, the total output level significantly dropped from 780,000 units to only 666,000 units per year. Moreover, the average number of employees leaving the organization increased from 7 production managers in 2014 to 12 production managers in 2016. The data reveals poor management, improper work ethics and a lack of organizational culture.
Recommended Actions for Improvement
As investigated above, ETCO Engineering Ltd is experiencing financial and management problems that lead to the low performance posted between the years 2014 and 2016. The cost of production and the cost of sales remained relatively high while the net profits of the organization kept decreasing. Despite the additional capital employed of 0.5 in the year 2015 and 2016, the revenues continued to decrease. A number of factors can be associated with the underperformance of the organization. First, the organization failed to implement a policy which would ensure minimal wastage through the manufacture of a lowest level of defective goods. As observed the percentage level of defective products from the manufacturing unit increased from 2.3% to 4.9%. According to Khan, Jaber, Zanoni and Zavanella (2016) defective products are those when after the manufacturing process has been completed, an imperfection that makes the product faulty or unfit for consumption, exists. The level of retained earnings for the organization continued to decrease indicating that the performance and efficiency of the business had declined significantly. The managers need to seal all pathways and avenues where finances are utilized inappropriately. For example, a high number of employees still receive payment even for the number of days they were absent from work. This increases the recurring expenditure for the organization further jeopardizing the company's financial position. Peretz, Levi and Fried (2015) defines absenteeism as the habitual absence of an employee from the workplace. While the employers of ETCO Engineering Ltd expect employees to be absent from work for a certain number of days, the scenario at the organization suggests more than the expected rate of absenteeism. The cost of increased absenteeism may translate to underperformance through less output levels, reduced morale of the workers remaining in the factories and inadequate dedication to the manufacturing processes which also result in more defective goods produced.
Reward System and Marketing Plan
ETCO Engineering Ltd should adopt a reward system for dedicated employees and appropriately compensate workers who work overtime. This strategy would reduce the number of employees who would be willing to miss from the workplace. Moreover, the morale of the workers would be significantly improved thus lowering the number of defective goods produced and increasing the output level of the organization (Ashkanasy, Zerbe and Hartel, 2016). A proper marketing plan should be drafted, evaluated, tested and implemented. According to McDonald and Wilson (2016) a marketing plan is a document that outlines all the company strategies for advertising and improving the sales levels of the goods produced. The marketing plan will allow the organization to focus on only those advertisement activities that will result in the highest possible returns levels. Through this planning strategy, unnecessary expenditure on activities that do not positively impact the sales volume will be avoided, thus reducing the cost of sales, and increasing the possible retained earnings. Given the price elasticity of demand (-1.6), the organization has an opportunity to increase its sales revenues by increasing the price per unit of goods produced. This means that when the price of the goods is increased, the total revenue will increase; higher sales volume. According to Ito (2014) price elasticity of demand refers to the percentage change in price of a goods, compared to the percentage change in the quantity of goods demanded.
Work Ethics and Customer Relations
Additionally, ETCO Engineering Ltd need to cultivate a proper work ethics that promotes team working, innovation and dedication. According to Khan and Rasheed (2015) proper work ethics include the adoption of principles such as hard work, integrity and dedication in the workplace to ensure that each employee helps to achieve the company targets and the various objectives in the short term and long term. I would recommend a framework with five principle factors to achieve proper work ethics and higher performance in the organization. First, it is important to conduct all company business with high professionalism which enhances seriousness with which employees handle their assigned tasks (Noordegraaf, 2016).
With a declining net profit levels, the organization needs to condition their employees to change their attitudes to customers and other shareholders. One way of increasing the revenue levels, which has increasingly reduced over the years, is to create better customer relations, encourage the customers to consumer more of the car components and thus increase the receipt from sale. To avoid defective products which can result in huge losses for the organization, ETCO should encourage its employees to carefully follow all customer requirements and specifications to produce goods acceptable to the consumer (Saeidi et al., 2015). This will reduce changes of spending more time in modifications, which can utilize resources and time that would have been otherwise invested in other productive activities. The recommendations given above rely on the information provided to me, financial statement analysis, operation and HR data and the industry average accounting rations for the year between 2014 and 2016. Should I have been provided with more information regarding other pertinent factors such as leadership quality, organizational culture and vision and mission statements, my recommendations may have changed.
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