ETCO Engineering Limited
ETCO Engineering Limited is a light engineering company whose operations are based in the West Midlands, United Kingdom. The company specializes in light engineering. It produces various components used in the motor vehicle industry. It was founded by Harry Calrke in 1973. ETCO Engineering Limited has operated as a family business since its inception. After Harry’s retirement in 2014, his two children, Charles and Lauren became its co-managers. Harry’s family is responsible for coordinating the day-to-day activities of the business. ETCO’s profits have always been above the industry average, especially in relation to medium-sized light engineering companies. However, profits have been falling since Harry’s retirement and are now below the industry average. The report analyses the company’s performance on the basis of the information produced by
Definition of Key Terms
Return in capital employed: It shows the entity’s profitability and efficiency of the capital employment over the accounting period.
Gross margin profit: The ratio of gross profit and revenues. It shows what is left after the cost of goods sold has been accounted for.
Net margin: The ratio of revenue that remains after deduction of taxes, interest and operating expenses from the total revenue generated by a company.
Analysis of company results
Ratio analysis
Return on capital employed (ROCE) calculated using net profit and capital employed.
Returns on capital employed is calculated as: Earnings before tax and interest ÷ Capital employed
2014: 0.86/10.5= 8.190% (The industry ROCE for this year was 9%)
2015: 0.42/11.0= 3.818% (The industry ROCE for this year was 9.2%)
2016: 0.30/11.0= 2.723%(The industry ROCE for this year was 9.5%)
This ratio is a representation of the entity’s ability to generate returns using the provided capital base (Pattabiraman 2013, n.p). The calculations above show that the ability of ETCO to generate returns has consistently deteriorated since Harry’s retirement. The industry ROCE grew over the three years. Therefore, the difference between ETCO’s ROCE and that of the industry has been increasing since Harry’s retirement.
Gross Profit Margin
Gross profit margin is calculated as: Gross profit ÷ Net Revenue or sales
2014: (2.3-0.92)/2.3= 55.7% (The industry’s gross profit margin was 55% in this year)
2015: (1.85-0.79)/1.85= 57.3% (The industry’s gross profit margin was 56% in this year)
2016: (1.6-0.70)/1.6= 56.2% (The industry’s gross profit margin was 55% in this year)
Gross profit margin shows financial health of an organization (Ebben 2018, n.p). It reveals proportion of money that remains after the cost of the goods sold are accounted for. ETCO was slightly above the industry average for the three years under analysis. This means that the company could meet the cost of handling the goods from the sales made. However, the difference between ETCO’s gross profit margin and that of the industry was lean and almost insignificant, meaning that the company can do better in reducing the cost of goods sold.
Net Margin
Net Margin is calculated as: Net income ÷ Net sales or revenue
2014: 0.86/(2.3-0.92)= 62.3% (the industry average was 35% for this year)
2015: 0.42/(1.85-0.79)= 39.6% (the industry average was 36% for this year)
2016: 0.30/(1.6-0.7)= 33.3% (the industry average was 37% for this year)
Net margin helps a company determine the amount of profit that it can extract from total sales. ETCO’s net margin has experienced a sharp decline over the three years. Though the company’s expenses have been declining over the years, its sales have also decreased so much that the decline in expenses has not had any significant impact on net margin. The best action in this case may be to keep the expenses low while increasing revenue by either raising product prices or selling more of them (Queensland Government 2018, n.p). ETCO can only gain competitive advantage if it focuses on selling more of the products rather than an increase in prices.
Revenue, Cost and Profit
The company’s revenue has declined over the three years. The costs have also been decreasing but at a lower rate. The following figures show labour productivity for the three years:
2014: 858000/780000= £1.10 per unit output
2015: 806520/675000= £1.19 per unit output
2016: 772200/666000= £1.16 per unit output
The cost of production per unit output increased from 2014 to 2015 before dropping slightly in 2016. The average number of production employees has also reduced over the three years. Defective output percentage has increased over the three years. This means that more resources are going towards production that does not end up yielding revenue for the company (Li et al. 2017, n.p; Wu et al. 2015, p. 3). Net profit has declined sharply over the three years under analysis. This may be attributed to the reducing productivity of workers and the increasing percentage of defective output.
Management and Leadership Styles
Human resource management and leadership seems to be one of the most significant undoing at ETCO since Harry’s retirement. The average number of production employees has been reducing over the years. Demand for light engineering goods and services has grown steadily over the years (Bergman et al. 2017, p. 18). The company should take advantage of this growth and increase its capacity to produce. Defective output has grown, indicating that fidelity to the production process has deteriorated. Though the actions that lead to defective production may either be deliberate or accidental, they can be minimized through adherence to recommended standardized procedures. Some of the key ways of preventing defective production is hiring qualified employees for skilled and semi-skilled roles, motivating them and remunerating them well (Lee and Kim 2014, p. 164; Baggen et al. 2016, p. 195; Abendroth et al. 2017, p. 209). It is the role of Charles and Lauren to ensure that all the people allocated responsibilities in the production process have the qualifications. The number of workers leaving ETCO has grown. High turnover in a company affects productivity (Baños-Caballero 2014, p. 5). The new workers employed to replace the leaving ones require time to learn organizational culture. The new workers may also fail to acclimatize to the working environment, resulting in inefficiencies in the production process (Elkjaer and Nickelsen 2016, p. 271). The results on operations and human resource are an indicator that human resource management is currently poor. Absenteeism has increased, an indicator that the employee’s have little or no motivation to work. This may be due to lack of financial incentives or a poor working environment. Operations have generally become inefficient, resulting in a reduction in productivity.
Solutions to ETCO’s Issues
ETCO is experiencing an increasing employee turnover. There is a need to either reduce the number of employees entering and leaving the organization or ensure that the new employees are well-acquainted with their responsibilities (Camara 2013, p. 3). The company should invest in training of employees to strengthen their skills. Training should entail blend-in techniques. These techniques are applied in both traditional classroom scenarios and online learning to equip employees with key information and skills that can help them meet the organizational goals (Nawaz et al. 2014, p. 6). Financial incentives should also be increased with the aim of increasing annual output. In this case, ETCO should come up with a formula for incentivizing involvement in production. Employees who get involved in the production of each unit above the set threshold should be traced and remunerated. Non-financial incentives such as awarding the most dedicated employees, those who keep time and avoid absenteeism should be introduced.
According to Maslow’s Hierarchy of Needs theory, the most basic needs of an individual must be met for them to become motivated and meet higher ones (De Vito et al. 2018, n.p). Maslow indicates that a person must first have the basic needs to enable them to survive; food, shelter, water, and clothing. The person must be secure in terms of their body, finances, and general well-being. All the needs at the two levels require finances to meet. ETCO must analyze price levels for basic needs and come up with remuneration structures that can help employees meet these needs. The company should also create an enabling working environment to enable people to form friendships within and outside the working place. Flexible working hours and leaves will enable employees to strengthen relationships with their families and friends, thus meeting the third need in Maslow’s hierarchy. The fourth need in this hierarchy is esteem. The management should make employees feel respected and confident by addressing them using appropriate language and listening to them. Meeting these needs results in self-actualization where the individual has the desire to work and meet their goals and those of the company (Jerome, N., 2013, p. 166). The key motivational factor to improve labor efficiency in this case is personal growth of the employees.
Need for More Information on ETCO
The data collected by the business consultant is in quantitative form. This data is important in facilitating recommendations on financial decisions. However, managerial decisions require both qualitative and quantitative information. There is a need for more information on how ETCO runs from the perspective of both the managers and employees. This information can draw the attention of decision-makers to the most pressing issues that should be addressed before dealing with the abstract ones that may require major adjustments. Therefore, there is a need for more qualitative data from individuals involved in ETCO’s operations.
References
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