Evaluating Business Performance

This document provides a comprehensive guide on evaluating business performance. It covers topics such as ratio analysis, benchmarking, performance measurement systems, and capital investment decisions. The document also includes a case study and written activities for practical application. Suitable for business students and professionals.

Running head: EVALUATING BUSINESS PERFORMANCE
Evaluating Business Performance
Name of the Student
Name of the University
Author Note

1EVALUATING BUSINESS PERFORMANCE
Table of Contents
Assessment Task 2 – Case Study.....................................................................................................2
Part 1............................................................................................................................................2
Part 2............................................................................................................................................8
Part 3............................................................................................................................................9
Assessment Task 4 – Written Activities........................................................................................11
Written Activity 1......................................................................................................................11
Written Activity 2......................................................................................................................15
Written Activity 3......................................................................................................................19
References..................................................................................................................................22

2EVALUATING BUSINESS PERFORMANCE
Assessment Task 2 – Case Study
Part 1
1. Computation of Ratios
a. Gross Profit ratio
Particula
rs
Formula X1 X2 X3
Sales 520000 700000 950000
Gross
Profit
310000 395000 530000
Gross
Profit
Ratio
Gross Profit/Sales
*100
59.6153
8
56.4285
7
55.7894
7
b. Net Profit ratio
Particulars Formula X1 X2 X3
Sales 520000 700000 950000
Net Profit 114286 142857 171429
Net Profit Ratio Net Profit/ Sales *100 21.97808 20.4081
4
18.04516
c. Liquid Ratio
Particulars Formula X1 X2 X3

3EVALUATING BUSINESS PERFORMANCE
Current Assets 380000 440000 488000
Current
Liabilities
100000 120000 130000
Liquid Ratio Current Assets/Current
Liabilities
3.8 3.666667 3.753846
d. Accounts Receivable Rate
Particulars Formula X1 X2 X3
Net Credit Sales 364000 490000 665000
Average Accounts
Receivable
30000 45000 48000
Accounts receivable
rate
Net Credit Sales/Average Accounts
Receivable
12.133
33
10.888
89
13.854
17
e. Inventory Turnover
Particulars Formula X1 X2 X3
Opening Stock 40000 50000 60000
Closing Stock 50000 60000 70000
Average Inventory (Opening Inventory + Closing 45000 55000 65000

4EVALUATING BUSINESS PERFORMANCE
Inventory)/2
Cost of Goods sold 210000 305000 420000
Inventory Turnover Cost of Goods Sold / Average
Inventory
4.6666
67
5.5454
55
6.4615
38
f. Return on Equity
Particulars Formula X1 X2 X3
Net Profit 114286 142857 171429
Equity Share Capital 520000 560000 620000
Return on Equity Net Profit/Shareholder's Equity 0.2197
81
0.2551
02
0.2764
98
g. Debt to Equity
Total Debt 50000
0
500000 500000
Total Equity 50000
0
560000 620000
Debt to Equity Total Debt/Total Equity 1 0.89285
7
0.80645
2
h. Total asset turnover

5EVALUATING BUSINESS PERFORMANCE
Particulars Formula X1 X2 X3
Net Profit 114286 142857 171429
Total Assets 110000
0
122000
0
130000
0
Total Asset Turnover Net Profit/Total Assets 0.1038
96
0.1170
96
0.1318
68
i. Return on Investment
Net Profit 114286 142857 171429
Total Investment 100000
0
106000
0
112000
0
Return on Investment Net Profit/Total Investment *100 11.428
6
13.4770
8
15.3061
6
j. Economic Value Added
Particulars Formula X1 X2 X3
NOPAT 80000 100000 120000
Invested Capital 100000
0
106000
0
112000
0
WACC 0.08 0.08 0.08
EVA NOPAT-(Invested capital*WACC) 0 15200 30400

6EVALUATING BUSINESS PERFORMANCE
k. Residual Income
Particulars Formula X1 X2 X3
Net Operating
Income
16978
6
20285
7
25142
9
Minimum required
return
12% 12% 12%
Cost of operating
assets
11000
00
12200
00
13000
00
Residual Income Net Operating Income - (Minimum required
return*cost of assets)
37786 56457 95429
2. Budgeted Income Statement for X4 and X5
Particulars X4 X5
Sales 1100000 1300000
Less: Cost of Goods
Sold
Opening Stock 50000 80000
Purchases 550000 600000
Goods Available 600000 680000
Less Closing Stock 80000 100000
Gross Profit 580000 720000

7EVALUATING BUSINESS PERFORMANCE
Less: Expenses
Marketing and
distribution
130000 160000
Office and
administration
209000 247000
Finance 95000 120000
Net Profit 146000 193000
Net Profit After Tax 102200 135100.0
3. Data provided is not sufficient to answer this question.
4. The possible short-term objectives for SLD organisation are to reduce the costs incurred
in manufacturing the products and to increase its profitability. Other objectives would
include improving the quality of the products that it manufactures. The long term
objectives of the organisation would include making its business more sustainable while
also improving on probable weaknesses like the efficiency of its supply chain and
improving the flexibility in its production (Heckmann, Comes & Nickel, 2015).
5. In case of SLD Corporation, the main indicator of a good performance is the efficiency of
production. In a situation where the production of trucks is above that of the previous
year, the production will be considered to be efficient. The next aspect that will be taken
into consideration is the cost of manufacturing the products. This will give an idea about
the profitability of the production. If the increase in the costs is not proportionate to the
increase in sales, then the product is not profitable (Babalola, 2013). Apart from the
manufacturing costs, other costs like administration and finance costs will also be taken

8EVALUATING BUSINESS PERFORMANCE
into account. Finally, the rate at which the business is growing will be considered to
develop the future production plans.
Part 2
6. In order to improve their product, SLD Corporation should engage employees more and
set individual targets for them. Apart from this, they should be also be encouraged to
come up with new ideas to improve the ongoing production process and make it more
efficient. To improve customer satisfaction, the company should avoid defects in the
engines manufactured by it (Rego, Morgan & Fornell, 2013). There should also be a
proper mechanism within the organisation to improve the communication with customers
and to immediately be available to solve their doubts about the product.
7. A balanced scorecard is a modern day tool used to measure the performance of an
organisation from all the perspectives that have an impact on the organisation. These
perspectives include the financial, customer, internal process and the organisational
capacity perspective. The main benefit of this tool is that it considers all the perspectives
and brings them together to attain the vision and mission of the company. Unlike activity
based management which only considers what the organisation is doing, the balanced
scorecard also considers the external factors that will have an impact on the organisation
(Hoque, 2014). The first step involved in the implementation of the balanced scorecard
are reaching an agreement about the terms used in the balanced scorecard and what they
mean. Other steps include understanding the results to be achieved, organising a proper
discussion about the strategy to be implemented, adding knowledge processing units and
ensuring that a cultural change occurs in the organisation.

9EVALUATING BUSINESS PERFORMANCE
8. The main advantage of benchmarking is that it allows the company to gain an
independent perspective on how it is performing in comparison to others. It helps a
company in setting up its future expectations and identify the areas in which it is lacking
as an organisation as a whole. It enables the organisation to improve itself on a
continuous basis. The benchmarks available to SLD Corporation are the financials of the
manufacturing companies in Australia (Cantore et al., 2017). These are available from the
annual reports of the respective companies.
Part 3
9. The factors that may prevent the performance measurement system of SLD corporation
from delivering the desired results are the size of the organisation, strategy implemented
in establishing the performance system, structure of the organisation, competition in the
market, type of the industry that the company is operating in and the human resources
employed by the organisation. Organisational culture also has a significant impact on the
results indicated by the performance system implemented by the organisation (Yadav &
Sagar, 2013).
10. SLD Corporation can reward its employees for their performances in the form of
incentives. This includes the regular form of incentives like hike in the pay, bonuses for
efficient employees and providing them with better facilities at the workplace. Other
rewards that are likely to motivate them are having more power or say in the decisions
made by the organisation and showing special affiliation towards them like providing
them with a vacation or giving their family some benefits are likely to improve the
productivity of the employees at the workplace (Edirisooriya 2014).

10EVALUATING BUSINESS PERFORMANCE
11. Communicating effectively and correctly is important to ensure that employees
understand the vision and mission of the organisation and become fully committed to
meeting the objectives of the organisation as a whole. The forms of communication that
can be used are the direct or verbal communication, written communication like
individual reports to the employees providing an in-depth analysis of their performance,
phone calls to employees on occasions deemed necessary and non-verbal communication
like communicating through body language and signs. A combination of all these
techniques is essential to ensure that the intended message reaches the employees in an
appropriate manner (Martin & Nakayama, 2013).
12. In order to make a good capital investment decision, there are a number of factors that
need to be considered. The most primary of them is that whether it fits within the overall
strategy of the organisation or not. The next important aspects to consider are whether
there will be an increase in the sales due to the investment, if the breakeven point of the
business will increase, if the cash flows will be positive and whether they will generate a
good return on investment. If all of the above mentioned factors are positive, then that
particular investment opportunity should be taken up (Barton & Wiseman, 2014).
13.
Particulars Amount
Sales 833333.3
Less: Cost of
goods sold
375000
Gross profit 458333.3
Less: Expenses

11EVALUATING BUSINESS PERFORMANCE
Marketing and
distribution
130000
Office and
administration
209000
Finance 95000
Net Profit 24333.33
In the given situation, if the goods are to be imported by SLD Corporation, then other
costs like administration and manufacturing overheads will not decrease in amount. Hence, the
overall profitability would go down. Also, due to the experience gained by them in
manufacturing the products, they can produce the good at a cheaper price. However, the present
scenario indicates an increase in the COGS per unit on a yearly basis. Hence, as the cost per unit
is low on importing the goods, it is better for the company to import the machines.
Assessment Task 4 – Written Activities
Written Activity 1
Ratio Analysis of C Juice
Gross Profit Ratio
Current Ratio

12EVALUATING BUSINESS PERFORMANCE
Inventory Turnover Ratio
Debt to Equity Ratio
Return on Investment
Interpretation of the results:
In the given situation, the operations of C Juice can be said to be quite profitable,
although there are varying trends among different aspects of the business. The gross profit ratio
has continued to decrease from 43 percent to 39 percent in the three years. This means that the
increase in the level of sales and the cost of producing the goods has not been proportionate. The

13EVALUATING BUSINESS PERFORMANCE
current ratio has continued to improve from 1.73 to 2.22. This means that the company can easily
meet its payment obligations with the assets that it has at its disposal. The inventory turnover has
been more inconsistent. However, it has increased a lot from 50 days to 68 days in the three
years (Pervan & Kuvek, 2013). This means that the company is taking more time to sell its goods
and this is not good. The debt used by the company in its funding has been increasing and this is
not good due to the increased risk of using more debt. However, the company has been able to
generate increased return on investment which means that the overall investment made by the
company is being put to good use.
S.W.O.T. Analysis
Strengths
Established player in the market and good
reputation.
Unique product made according to customer’s
specifications.
Ideal location for conducting business
Weaknesses
Using only cash flows to generate funds.
No accounts receivable balances.
Opportunities
Further expansion opportunities to reach new
cities and across cities.
Customer Cards to develop customer loyalty
and analyse their drinking habits.
Threats
Disproportionate increase cost of goods
produced.
Development of other competitors.

14EVALUATING BUSINESS PERFORMANCE
Course of Action for C Juice:
C Juice should try to continue to invest in its research and development activities to
ensure that it continues to hold the market advantage that it has over its competitors. Other
courses of action that it should take are to identify the areas in new markets that it should
establish itself in to make the business more profitable. It should try to reduce the cost of goods
produced by it and should also keep an eye on the threats arising from other competitors.
Activity 1.2
Budgeted X4 Variance %
Sales 800000 820000 20000 2.5
Less Cost of goods sold
Opening stock 190000 190000 0 0
Purchases 530000 518400 11600 2.18868
Goods available 720000 708400 11600 1.61111
Less Closing Stock 240000 200000 40000 16.6667
Gross Profit 320000 311600 8400 2.625
Less expenses
Marketing and
distribution
32000 41000 -9000 -28.125
Office and
administration
148000 164000 -16000 -10.811
Finance 16000 24600 -8600 -53.75

15EVALUATING BUSINESS PERFORMANCE
196000 229600 -33600 -17.143
Net profit 124000 82000 42000 33.871
Net profit after tax 86800 57400 29400 33.871
The reasons for variances in the results may be due to a variety of reasons. Some of them
include wrong estimates at the time of preparing the budget, unproductivity on part of the
employees, reduced demand due to unforeseen circumstances and any accidents occurring in the
place of business that reduced the sales of the business.
Activity 1.3
The short term objectives of C juice are to decrease its cost of production, avoid the
threat posed by the new competitors, increase its cash flows in the short run and try to create a
new method for properly maintaining its accounts receivable (Kasiran, Mohamad & Chin, 2016).
The long term objectives of the organisation include maintaining an appropriate process of
conducting the business, expanding and stabilising its business in newer, unexplored markets and
maintaining its reputation as a quality business.
Written Activity 2
Activity 2.1
The two financial measures for C juice are the net profit after tax and return on
investment.
Manager 1: Hello Michael, how are you doing today?

16EVALUATING BUSINESS PERFORMANCE
Manager 2: Hello John. I am fine. Thank you. Have you decided about the financial measures
that we were talking about yesterday?
Manager 1: Yes. I have identified the net profit after taxation as a good measure of measuring the
performance of our entity.
Manager 2: Why is it so?
Manager 1: This is because I consider it to be an important measure of how profitable our
business has been as a whole. This measure suggests the amount that is available for distribution
to the shareholders and to be used for further investment in the business. This also suggests how
well we have performed in comparison to the previous years. Which measure have you identified
as important?
Manager 2: I think return on investment is a good measure of the financial performance of the
entity. As we invest a lot of amount in the business, it is important to make sure that we are
getting satisfactory returns on the amounts invested by us. Even if the net profit may be very
high, it should be checked in relation to the investment. Otherwise, it cannot be suggested that
our operations in a particular year were profitable. So I consider it to be a good measure.
Manager 1: That is a good suggestion. Have a good day.
Manager 2: Your suggestion is also very practical indeed. Have a good day yourself.
Activity 2.2
The customer perspective measures that could be used by C Juice are feedback forms and
suggestion forms for identifying the areas that they can improve in. As a business that
completely depends on the customer perception towards its product, the entity should always

17EVALUATING BUSINESS PERFORMANCE
stay in touch with its customers to make sure that they are satisfied with its product. Their
suggestions are important because implementing them can lead to much better results in certain
situations. Other than these, the organisation can also conduct timely activities like marketing
and advertising campaigns to attract customers and retain them as well (Tjader et al., 2014).
Activity 2.3
The internal business process measures are the costs incurred to produce a juice of a
particular kind. This is because the company’s gross margin is currently on the decline and hence
it needs to be improved to make sure that the business has improved its production process.
Other measures include the rate at which it is innovating as this is useful for the company to keep
its competitors at bay. The final measure of the effectiveness of the company is the level of
production made by the company in a particular year. This is to ensure that the company is
improving in terms of fully utilising the investment made by it (Zikmund et al., 2013).
Activity 2.4
The learning and growth measures that can be used by C juice are positive customer
feedback, improvement in residual income and economic value added by the business. These are
important measures because they suggest how much a business has learned from its previous
methods of conducting operations and whether it has improved from the previous weaknesses
learned by it or not. They are also chosen because of the usefulness of the information provided
by them and their importance to the shareholders to ensure that the business has been growing on
a continuous basis (Yu et al., 2013).
Activity 2.5

18EVALUATING BUSINESS PERFORMANCE
The customer cards are an important measure of suggesting that customers are interested
in continuing their association with the business. Having a customised feedback form attached to
the customer card indicates the tastes and preferences of the consumers and what the business
needs to do to improve their experience in visiting the business. They also indicate key
performance indicators like taste of the juice, quality of the product and service and the aspects
that the company can improve in. Apart from these, it also suggests to the business about the
aspects that are unique to it and helps it in marketing its product (Saleem & Raja, 2014).
Activity 2.6
Matching the words with their meanings
Budget A minimum acceptable
standard
Processes A series of actions to achieve
an objective
Measure Indicator by which
performance is evaluated
Activity based objectives A performance system that
eliminates those activities that
do not add to customer value
Balanced scorecard A measurement system of
both financial and non-
financial aspects based on

19EVALUATING BUSINESS PERFORMANCE
critical factors
Benchmark A measurement system of
both financial and non-
financial aspects based on
critical factors
Activity 2.7
Perspective Measures Measures Measures
Financial Interest coverage Growth in sales and
profit
Number of training
hours
Customer Customer survey Customer returns Sales Trends
Learning and growth Inventory turnover Cycle time Number of defects
Internal process Employee survey Machine efficiency Employee turnover
Written Activity 3
Activity 3.1
The environmental factors that C Juice would need to consider are the nature of the new
markets that it is entering into, technological advancements that have been achieved in that
particular market, products of the competitors and customer perception towards those products,
political and legal environment in the new market, demographics or choices and preferences of
the customers in the area in which the business is going to be established. Apart from these, the

20EVALUATING BUSINESS PERFORMANCE
business should also consider whether the place of setting up the new business is ideal for
conducting the business or if it needs to identify a new location for the same.
Activity 3.2
Activity Driver
Purchasing Demand for the product and number of
purchase orders created.
Plant management Annual production, usage of the plant and
future requirements.
Product design New design of competitor, need for
improvement in design and changes in the
market.
Machine set up Expansion of the production facilities and
establishment of a new factory.
Machining Increase in the productivity of the machine
Rework Bad production quality at the first time of
production, damage to already produced
goods and others.
Production scheduling Availability of employees, production
capacity of the machine and production

21EVALUATING BUSINESS PERFORMANCE
requirements.
Activity 3.3
Other than the activities mentioned above, the other factors that need to be considered are
the cost of producing the product in the new area, benefits that can be achieved by outsourcing
the production to other parties and improvements that can be made in the nature of the product
manufactured by the organisation.
Current machine’s productivity
Other Machine’s productivity
If both the machines are able to maintain the same level of productivity, then new machine is less
productive than that of the current machine. Hence, the other factors that need to be considered

22EVALUATING BUSINESS PERFORMANCE
are the productivity of the machine, costs incurred in installing it in the business premises and
the purposes for which the machines can be used for apart from the production of smoothies.

23EVALUATING BUSINESS PERFORMANCE
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Cantore, N., Clara, M., Lavopa, A., & Soare, C. (2017). Manufacturing as an engine of growth:
Which is the best fuel?. Structural Change and Economic Dynamics, 42, 56-66.
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Heckmann, I., Comes, T., & Nickel, S. (2015). A critical review on supply chain risk–Definition,
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Kasiran, F. W., Mohamad, N. A., & Chin, O. (2016). Working Capital Management Efficiency:
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