To what extent are a company’s annual report and accounts useful in understanding and analysing its market, productive and financial performance? There is no doubt that financial accounts/reports are important in analysing the success of a company both from the inside and outside of the company. The amount of importance it has though is often widely disputed. “The Financial reports or accounts are one source of information available to those who wish to evaluate its performance”1. This quote therefore identifies that accounts/reports are one method to which we can use to analyse performance, but it is not the only method.
Therefore the amount of importance it carries in analysing the performance of a company in its market, and also its financial and productive performance is questionable. Generally we will find that in many countries companies are required to provide some sought of financial account/report for a particular year, this is particularly apparent when it comes to Plc’s where there are many shareholders thus annual accounts must be publicly announced. The accounts should be relatively complete in their depiction of the financial state of a business.
Although this does however bring us to our first problem, which is indeed a general problem. The expectancy of accounts does vary considerably from country to country, therefore what is expected to be included in an account may vary. Therefore when comparing companies across international borders against market, financial or productive performance we may well struggle. For example we found it very difficult to obtain labour costs for companies inside the UK, whilst American companies appeared to be much more forthcoming in stating its cost of labour.
But this can also occur in other areas of the accounts. E. g. number of employees, etc. We shall first look at the usefulness of financial accounts/reports in assessing the performance of a company productively. Obviously using the figures obtained from particular accounts there are a large number of methods in which we could analyse productive performance. Although the figures which tell us most about the efficiency of the production line are linked to the amount of inputs opposed to the number of outputs on a particular line.
“There are many measures of productive performance but the most important are productivity measures that measure the relationship between inputs and outputs”2. There are a couple of ways in which we can analyse productive performance and efficiency. Firstly we can look at the amount of physical input against output, using BT as an example and the figures below:In this example it would have been more conclusive to use output as in units against employees, but these output figures are difficult to distinguish for group predominantly in the service sector, therefore I had to use sales.
Looking at the accounts we can see that there has been a massive increase in the amount of sales per employee quadrupling over the period (1985-97). At first sight we would assume that there has been a massive increase in productive efficiency. Therefore BT can produce a greater amount of Products/Services with a much smaller amount of employees. What these figures may not tell us though is that technology is now completing a vast amount of the jobs once completed by employees, such as automated services and satellite links, opposed to the once over-worked phone operator.
So the employees themselves have not necessarily become anymore efficient. The goods that BT are now producing may have also changed, phones are now much smaller, especially mobile phones which require less and less components to be compiled within them, thus less work, thus also less employees. There has also been a big emphasis on the providing of Internet services to their customer, which requires little physical labour but has seen very profitable results. Therefore these factors could go a long way to analysing the productive performance of BT.
Has BT been anymore productive or has it simply simplified its production line. These factors are not often exhibited in such accounts/reports. Thus factors may go unexamined. Therefore we can assume that BT has increased its productive flow, how successful it is productively in this sense is determined by the goals it sets itself. Therefore although the accounts are useful in a sense, they do not go far enough in enabling the outsider to analyse whether a company has been successful productively.
Maybe they have simply changed tactics or spread itself into another market; this of course though would not be recognised in the accounts. Also it is very difficult to compares these kind of figures with different companies in different markets as different companies require a different amount of effort and work to produce their output, for example it would be like comparing BT’s output per employee to Ford’s output per employee. Comparisons would be very difficult. Thus very difficult to establish who is successful and who is not.
The figures show us that Labour’s share of V. A fell during the period, whilst operating profit’s share grew, this would suggest that the firm was relatively successful over this period. These figures therefore allow us to make easy comparisons over previous years; we do not have to worry about the changing rates of inflation. It also allows to us to make easy comparisons with companies in different markets or industries. This is because it strips out of the equation the varying amount of work that has to go into production etc.
Therefore I believe this expresses that such accounts are most useful in examining the financial success of a company. Therefore in this aspect of the business the accounts and reports provide an integral part of the analysis of performance. There are also a number of other methods, which can be used to determine the successfulness of the company financially. These include Break-even point; cash flow as % of V. A. Therefore from such accounts a vast number of analytical data can be produced.
We must also look at how useful financial accounts are in understanding market performance for a company. The two ways to look at market performance is either to look at the amount of sales as in units in a particular market or to look financially at the company in it’s relative markets, thus turnover etc. It was very difficult to obtain any unitary figures of sales for BT as it is a service-based company, therefore the accounts were inadequate in this circumstance. Read how IKEA pay for performance