Assignment Sample on Financial Performance Management
Introduction
Financial performance analysis is subjective measure which projects ability of company to utilise financial resources for generating revenue. Financial performance analysis provides brief insight to stakeholders about company which facilitates decision making process. The process comprises both financial and nonfinancial measures for determining a company’s performance. The study sheds light on financial performance of Next Plc (Company A). Closest competitor of Next Plc has been identified as M&S Plc (Company B). Next Plc is British multinational clothing organisation that has headquarter in Leeds, UK. Similarly, M&S Plc is British multinational retailer that has headquarter in London, UK. The study would focus on financial performance analysis using ratios, balanced scorecard and integrated reporting. Application of integrated reporting on Next Plc has been made along with development of balanced scorecard and critical evaluation of critical success factors of Next Plc. Besides, critical evaluation of Kaplan and Norton’s balanced scorecard as a strategic management system has been made in the study. Competitor of Next Plc has been identified by help of a competitor analysis framework. Key criteria of competitor analysis is company specific data, target customers, positioning and product specific information. Further, conclusion has been drawn on the overall study of financial performance management.
Question 1: Financial Performance using Ratio Analysis
Financial ratio analysis acts as quantitative method for gaining brief insight into company’s operational efficiency, profitability, viability and liquidity position of business. According to Rulandari and Sudrajat (2017), ratio analysis acts as cornerstone of fundamental worth analysis of business. Ratio analysis of Next Plc has been made by assessing the closest competitor. As per competitive analysis, M&S is closest competitor of Next. Presentation of two organisations and criteria used for identifying competitor has been made as under:
| Competitive Analysis Framework | |||
| Details | Next Plc | M&S Plc | |
| Company specific data | Employees | 44193 | 85000 |
| Profit
|
£4.3 billion | £10.2 billion (Corporate.marksandspencer, 2021) | |
| Founded | 1864 Leeds, UK | 1884 Leeds, UK | |
| Strength | 700 stores worldwide | 1382 store worldwide | |
| Target customers | Products | Consumer goods | Consumer goods |
| Buyers | 5 million | 18 million | |
| Target customers | 25-45 age range | 35-55 age range | |
| USP | 2nd largest clothing retailer (next.co.uk, 2021) | 21 million new customers every week | |
| Product specific | Pricing strategy | Flexible pricing | Dynamic pricing |
| Products strength | High/Moderate | High/Moderate | |
| Customer review | High | High | |
| Positioning | Operating through | Innovation | Promotional learning forwards |
| Attracting customers through | Building brand image | Marketing tactics | |
Liquidity ratio
Current ratio: Current ratio is liquidity ratio which analyses ability of venture to meet short-term obligation by financial resources. An ideal current ratio for an organisation is 2:1 (Kfknowledgebank.kaplan.co.uk, 2021).
Current ratio of Next is 1.59 times in 2019 and 2.06 times in 2020. So, an increasing trend in liquidity position of Next has been found. However, M&S has 0.62 times current ratio in 2019 and 0.6 times in 2020. Next has higher current asset in 2020 than M&S which has helped the venture in paying-off all current liabilities in 2020.
Acid test ratio: Acid test ratio is liquidity ratio which compares short-term assets of business with short-term liabilities. An ideal current ratio for an organization is 2:1 (Kfknowledgebank.kaplan.co.uk, 2021).
Acid test ratio of Next is 1.19 times in 2019 and 1.50 times in 2020. It shows 0.31 times higher short-term assets in 2020 as compared to 2019. However, M&S has 0.32 times acid test ratio in 2019 and 0.35 times in 2020. Next has higher current short-term assets in 2020 than M&S which has helped the venture in paying-off all short-term obligations in 2020.
Profitability ratio
Net profit margin: It is profitability ratio that helps in comparing net profit of company with total revenue. A higher net profit & revenue indicates better performance of business (Husain and Sunardi, 2020).
Next has consistency in profitability in last two years but profit of M&S has been declined by 0.1% in 2020. Next has an increasing trend in revenue and net profit but M&S has decreasing trend in revenue and profit.
Return on Equity: It is the measurement of profitability which analyses the contribution of shareholders’ equity in generating revenue. Formula of return on equity is “net income/ total equity” (Busco and Quattrone, 2015).
Evaluation of return on equity for Next and M&S shows better performance of Next than M&S. Net income of Next is higher than M&S in the last two year. But, proportion of equity in M&S is greater than Next which signifies higher proportion of debt capital in capital structure of Next.
Efficiency ratio
Receivable period: It is measurement of cash inflow which is calculated by dividing receivables by sales. According to Jikia and Kharabadze (2018), a higher receivable days indicates declining performance of business.
Sale of Next is £80 million higher and receivable is £30 million higher in 2020. Similarly, revenue of M&S is increased to £108770 million in 2020 from £97525 million in 2019. Receivables of M&S is increased to £298 million in 2020. It shows consistency in collecting due from customers in Next. Besides, M&S has taken 2days extra for collecting dues from customers. It means Next has more efficient performance than M&S.
Payable period: It is measurement of cash inflow which is calculated by dividing payables by cost of sales. A lower payable period indicates improving performance of business (Jikia and Kharabadze, 2018).
Payable period analysis shows Next has taken 1day lower for paying dues to suppliers whereas consistency in payable period of M&S has been found. Slight reduction in trade payable of both the companies has been found. However, the ratio indicates better performance of M&S. Competitors of Next had taken lower time to pay-off short-term debt which is good for its performance.
Inventory period: Inventory period is measure of average number of days stocks are held in business. A lower inventory period is desired by commercial business (Jikia and Kharabadze, 2018).
This ratio projects better performance of Next Plc’s competitor in 2020. An increasing trend in inventory period has been found for Next. But, M&S has taken 8days lower for converting inventories and sales. Thus, M&S Plc is more efficient than Next Plc in terms of inventory period.
Solvency ratio
Debt-Equity Ratio: It indicates proportion of debt in capital structure as compared to equity (Satryo et al. 2017). A higher debt capital in capital structure means higher risk factor in business.
Presence of debt in Next and M&S has been declined in 2020 than 2019. However, proportion debt is higher in Next as compared to equity. It means M&S has had more efficient performance in last two year than its closest competitor Next.
Debt-Asset Ratio: Debt-asset ratio indicates percentage of debt associated with business as compared to total asset. As opined by Satryo et al. (2017), formula of debt-asset ratio is “total debt/total assets”.
In both Next and M&S, proportion of total debt has been reduced in 2020. In Next, decreasing trend of total assets has been found but M&S shows an increasing trend of total assets. Next, higher proportion of assets were financed by management as compared to M&S. Presence of higher debt enhances leverage risk in Next as compare to M&S.
Interest Coverage Ratio: Interest cover ratio means earnings before interest and tax divided by interest expenses (Li et al. 2017). It signifies how many times company can cover interest expense with available earnings.
Interest cover ratio of Next has been increased by 0.3 times in 2020 but interest cover of M&S has reduced by 0.1 time in 2020. So, Next Plc is more able to honour its interest expenses as compared to M&S. However, interest expenses of M&S is higher than Next it means M&S has made higher interest payment in 2020.
Question 2: Balanced Scorecard
Concept of Balanced Scorecard
Kaplan and Norton’s balanced scorecard was evolved in early as a business performance metrics of a firm for analysing both financial and non-financial data. It analyses financial resources from past outcomes and predicts future financial outcomes and it monitors and implements strategic plans. According to Kaplan and Norton, (2007), balanced scorecard observes the process of perfecting business ideas and for both organizational needs and business specificities. The main objective balanced scorecard (BSC) is to create a vision by aligning business activities and improving internal and external connections of an organisation to achieve strategic goals of this company. This BSC framework focuses on the four perspectives of an organisation: financial, internal process, customer perspective and growth of organisational capacity (Hogue, 2014). . Creating a vision and measurement of business performance of Next Plc Company by implementing BSC model will help this company for growing and developing their strategic management plan.
Vision of Next Plc
The vision of Next Plc is to be one of the best clothing retailers in UK by satisfying their customers and services (next plc.co.uk, 2020). This company depends on its fundamental resources to expand their business and their management constantly tries to develop their marketing strategy. This company is focused on meeting the highest level of customers’ expectations by giving them the best clothing services.
Strategy of Next Plc
The primary financial objective of Next Plc is to focus on the long term delivery process, sustainability of shareholders and by combining these two making growth of Earning Per Shares. It has been reported that in the past ten years EPS and dividend of equity shares have increased by 170% of this company (next plc.co.uk, 2019). In order to expand the sales unit and revenue of this company, management has decided to focus on customers’ expectations and improve their range of products. This company is engaged to make better profitability, the management has decided to analyse investment criteria and for maintaining financial resources. This organisation is concentrated to make an efficient balance sheet and a profit and loss account.
Critical Evaluation of Balanced Scorecard Of Next Plc
Financial Perspective
Any market oriented company needs to look after their shareholders performance for growing their financial resources. Next Plc has reduced their debt by €502 to € 610m and a pandemic situation has affected their sales unit. From the annual report of this company, it is stated that net profit after tax has declined to 51% and for this EPS has decreased to 51% (next plc.co.uk, 2021). This variance of this EPS has represented non-performance of financial management and management should implement a new strategy to recover this. The value of return investment capital if it exceeds 100% then it proves a sustainable profitability. This company’s Return on Investment is 27.60% and for this company needs to concentrate more on increasing investment. In 2021, the ordinary share price has decreased by €13.9m to €13.3m and dividend has also shown a decreasing rate this year. The trading profit has decreased by €772.5m to €383.5m which indicates non-performance of financial operation. This year Next Plc Company cannot achieve its financial perspective and the company needs to concentrate on their financial operating activities.
Customers Perspective
Next Plc is focused on customers reliability and sustainability by providing them best services and fulfilling their needs. This company is able to attract new customers, achieve customer’s profitability, and understand the target segment which helps this company to retain more sales. Next Plc companies grow even with macroeconomic issues that people have limited purchasing power. Since, this company is identified as one of the most trained UK retail chains, it becomes beneficial for this company to make a market online. Next Plc Company has made a stronger investment to increase their sales and in this year Next Plc has operated revenue € 2,503m from online stores and their total segment revenue is €5,082.5m ((next plc.co.uk, 2021). This company understands customers’ emotions and adjusts the price of their products to gain customers loyalty.
Internal Process Perspective
Internal aspects of this business are concentrated on customer satisfaction and the rise of shareholders. In order to compete with on growing clothing retail sectors such as Mark and Spencer Group Plc, Arcadia Group Limited, this company is constantly trying to satisfy target segments to improve customer satisfaction. In addition this company has improved their distribution channels in global aspects.
Learning and Growth Perspective
The learning and growth of this company is employee centric and Next Plc has stated that employees play a vital role in achieving business objectives. Training and development programs for staff like giving annual training, ILO stores convention programs, , health and safety, welfare programs and giving a well working environment are related in strategic management to ensure growth of this company.
Proposed Balanced Scorecard
Critical success factors of a business consider five factors in a balanced scorecard. Next Plc Company should implement these performance metrics to develop this framework.
- Strategic Focus: Next Plc company needs focusing on their leadership. A perfect leadership can motivate employees to improve their performance and it helps to achieve business objectives (Busco and Quattrone, 2015). . In this respect a stronger management is required for this company to plan strategically.
- People: Next Plc Company needs to concentrate on their human resources management program. More learning and development plans for staff will help this company in achieving business goals.
- Process: Next Plc Company requires a more efficient operational process in order to achieve objectives in this business. Strategy for making more operational activity in an organisation indicates growth and prosperity.
- Marketing: Focusing on the whole sales, Next Plc should need better customer retention and reliability. This company’s objective is marketing oriented and achieving this company’s aim requires more efficient market strategy to attract customers
- Finances: In order to better perform, activities of financial resources are addressed as the most important factors to be considered (Cardinaels et al. 2010). Next Plc has faced issues in this years in their financial activities which is needed to be recovered.
Question 3: Integrated Reporting
Integrated reporting (IR) is corporate communication about company’s vision, mission, governance, prospects and performance in context of its external environment. Integrated reporting facilitates value creation over time (De Villiers et al. 2017). As per IR, organisation requires evolution in the reporting system in order to facilitate communication without complexities and frequency in present reporting system. It acts as an evolutionary tool for corporate reporting in changing business arena (Integratedreporting.org, 2021). As per International Integrated Reporting Framework (IIRF), IR facilitates conceptual thinking and application of accounting & reporting principles within organisations. IR enhances quality of information provided to stakeholders, promotes corporate reporting, supports integrated thinking and enhances accountability of ventures (Integratedreporting.org, 2021). Therefore, application of this framework in Next Plc is beneficial in order to operate ethically in the international business environment. Application of IR in an international organisation comprises both benefits and challenges. An organisation like Next Plc acquires to utilise the benefits of integrated reporting and mitigate the challenges for operating fruitfully.
Benefits of IR
Benefits of IR for Next Plc has been focussed below:
Contribution to more efficient capital market: There exists positive relationship between stock liquidity & firm value and IR quality. IR quality and firm value is driven by enhancing expectation of future cash flow. For instance, the investment process requires analysis of business mode, strategy and financial performance. So, application IR as per International integrated reporting framework, would facilitate investment decisions of Next Plc’s investors. As per International integrated reporting framework, IR acts as cohesive approach of corporate reporting that enhances satisfaction to stakeholders.
Value creation: IR provides better understanding to organisations about performance and resources. It acts as driver of long-term value and facilitates strategy formation of an organisation (Kılıç and Kuzey, 2018). International integrated reporting framework provides identification measures for non-financial factors. Also, applying this factor would provide similar importance to both financial and non-financial factors instead of focusing only on financial factors. As per International integrated reporting framework, integrated reporting enhances stewardship for broad base capital of business. In Next Plc, implementation of integrated reporting facilitates development of appropriate strategy that provides long-term returns to stakeholders.
Improving relationship with stakeholders: As IR facilitates creation of value and communication with key stakeholders, it is beneficial for companies to win trust of stakeholders by enhancing the reputation of business. Enhancing business reputation is beneficial for improving stakeholders’ satisfaction (Massingham et al. 2019). In case of Next Plc, implication of IR would help the business in maintaining good relationships with key stakeholders and would help in enhancing investors in business. Improving relationships with stakeholders is beneficial for Next Plc in order to beat competitors.
Improvement in financial & non-financial performance: Implementation of IR is beneficial for organisations in order to maintain sound arrangements of financial & non-financial performance. Implementation of this approach helps in communicating both financial and non-financial information as per corporate reporting regulations, so it is beneficial for improving company’s performance (Integratedreporting.org, 2021). Implementation of integrated reporting would facilitate non-financial and financial performance of Next Plc while operating in an international business environment. So, higher returns from business operations can be obtained by implementation of IR in Next Plc.
Communication: Implementation of integrated reporting in business encourages communication with key stakeholders. As it facilitates development of single report which is easily accessed by all stakeholders, sound communication of information can take place in business (Hoque, 2017). In the case of Next Plc, using IR would facilitate good communication in internal and external environment of business. Prevention of complexities and miscommunication can take place in Next Plc by implementation of IR.
Challenges of IR
Challenges of IR for Next Plc has been focussed below:
Comparability & consistency: In IR framework, practice and thinking is immature in evaluating value of organisation. The framework emphasises on non-financial resources for identifying meaningful performance measures of business. So, implementation of this framework in Next Plc required more emphasis on non-financial aspects than financial aspects. As per International integrated reporting framework, natural, financial, manufactured, human and intellectual capital is emphasised (Integratedreporting.org, 2021). So, Next Plc is required to maintain a high focus on non-financial elements as compared to financial elements.
Consciousness: It has been found that most of the integrated reports have more than hundred pages. As IR includes brief information for supporting decision making of stakeholders, there exists a higher number of pages in annual reports (Malafronte and Pereira, 2020). However, it becomes difficult for companies to reconcile meaningful and consciousness communication with key stakeholders. It act as challenge in implication of integrated reporting in administrative framework of Next Plc.
Connectivity: In IR framework, companies are required to break down silos within management and change existing data collection processes. It has been identified as the biggest challenge in implementation of IR (Integratedreporting.org, 2021). In order to implement IR in management of Next Plc, higher executives of Next Plc require the breakdown of silos and change the existing data collection process. However, it would be tough for the company to shift from the previous data collection process to the new process as per International integrated reporting framework. It act as challenge in insinuation of integrated reporting in company’s administrative framework.
Increasing liability of directors: Application of IR within organisation requires making changes in data collection method and company silos. It enhances director liability in business. Due to this factor, dissatisfaction in directions may take place (Dumay et al. 2016). Application of IR in management of Next Plc may enhance discrepancies as dissatisfaction in directors may enhance. It is necessary for higher executives of Next Plc to reduce liabilities and dissatisfaction of directors.
Completeness & reliability: An organisation is required to maintain balance in good and bad news in corporate reporting. An organisation is required to implement adequate measures of internal control and external assurance that facilitate reporting good and bad news in integrated reports (Integratedreporting.org, 2021). In case of Next Plc, management is required to maintain balance between good and bad news in corporate reports which would help the venture in enhancing reputation and image in the eyes of stakeholders. It act as challenge in implication of integrated reporting in organisational framework.
Conclusion
Financial performance analysis facilitates business decision making. An organisation can determine non-financial and financial information by help of financial performance analysis. Competitor analysis framework act as crucial tools for assessing closest competitor of an organisation. Financial ratio analysis helps in understanding financial performance of company. The main aim balanced scorecard is to create a vision by supporting business activities and improving internal and external connections of an organisation to achieve strategic goals of this company. Integrated reporting improves quality of information provided to stakeholders, promotes corporate reporting, supports integrated thinking and enhances accountability of ventures. Application of financial ratio analysis measures shows better performance of Next Plc than its closest competitor. Next Plc should align it strategic focus, people, finance, marketing and process in order to implement balanced scorecard in Next Plc. Financial ratios projects better performance of Next Plc’s competitor in 2020. In case of Next Plc, insinuation of IR would help the commercial business in upholding good relationships with key stakeholders and would help in enhancing investors in business. Application of integrated reporting framework in Next Plc is advantageous in order to function ethically in international business environment. Application of integrated reporting in an international organisation like Next Plc comprises both benefits and challenges. Application of IR within Next Plc may increase confusion and liabilities of directors. So, it may act as challenge behind implementation of IR in Next Plc.
References
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Appendix
Liquidity ratios
| Current ratio | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Asset (Current) | 1,978 | 1,955 | 1,435 | 1,215 |
| Divide-Liability (Current) | 1,244 | 950 | 2,325 | 1,849 |
| Current ratio | 1.59 | 2.06 | 0.62 | 0.66 |
| Acid test ratio | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Asset (Current) | 1,978 | 1,955 | 1,435 | 1,215 |
| Subtract- Inventory | 503 | 528 | 700 | 564 |
| Asset (Net) | 1475 | 1427.8 | 734.7 | 650.9 |
| Divide-Liability (Current) | 1,244 | 950 | 2,325 | 1,849 |
| Acid test ratio | 1.19 | 1.50 | 0.32 | 0.35 |
Profitability ratios
| Net profit margin | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Profit (Net) | 599.1 | 610.2 | 45.3 | 27.4 |
| Divide-Revenue (Sales) | 3,917.10 | 3,997.50 | 10377.3 | 10,182 |
| Net profit margin | 15.3% | 15.3% | 0.4% | 0.3% |
| Return on Equity | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Income (Net) | 599.1 | 610.2 | 45.3 | 27.4 |
| Divide-Equity | 366 | 442 | 2,469 | 3,709 |
| Return on Equity | 164% | 138% | 2% | 1% |
Efficiency ratios
| Receivable period | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Receivables (Debtors) | 1,285 | 1,315 | 267 | 298 |
| Multiply- Days (365) | 469171 | 480085 | 97528 | 108770 |
| Divide-Revenue (Sales) | 3,917.10 | 3,997.50 | 10377.3 | 10,182 |
| Receivable period | 120 | 120 | 9 | 11 |
| Payable period | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Payables (Creditor) | 596 | 592 | 1,426 | 1,424 |
| Multiply- Days (365) | 217650 | 216080 | 520636 | 519906 |
| Divide- Cost of sales (goods sold) | 2,562 | 2,584 | 6,558 | 6,590 |
| Payable period | 85 | 84 | 79 | 79 |
| Inventory period | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Inventory | 503 | 528 | 700 | 564 |
| Multiply- Days (365) | 183522 | 192574 | 255646 | 205896.5 |
| Divide- Cost of sales (goods sold) | 2,562 | 2,584 | 6,558 | 6,590 |
| Inventory period | 72 | 75 | 39 | 31 |
Solvency ratios
| Debt-Equity Ratio | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Debt: long-term | 2,132.70 | 2,282 | 4,056.90 | 4,626 |
| Divide-Equity balance | 366 | 442 | 2,469 | 3,709 |
| Debt-Equity Ratio | 582% | 517% | 164% | 125% |
| Debt-Asset Ratio | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Debt: long-term & short-term | 3,376.40 | 3,232 | 6475.4 | 6381.8 |
| Divide-Asset Fixed & Current | 3742.6 | 3673.3 | 8851 | 10183.9 |
| Debt-Asset Ratio | 90% | 88% | 73% | 63% |
| Interest Coverage Ratio | ||||
| Details | Next Plc | M&S Plc | ||
| (£m):2019-Sum | (£m):2020-Sum | (£m):2019-Sum | (£m):2020-Sum | |
| Income (Operating) | 841 | 854 | 298 | 255 |
| Divide-Expenditure (Interest) | 108 | 106 | 249 | 235 |
| Interest Coverage Ratio | 7.8 | 8.1 | 1.2 | 1.1 |
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