Assignment

on
“Supply Chain Management”

Title: Financial Measures of Performance

Submitted to:
Mr. Mohammad Imran
Assistant Professor
Faculty of Business Administration
University of Science & Technology Chittagong.

Submitted By:
Name : Md. Abdullah Al Mahmood
Roll # : 920
Batch : 38th
Program : MBA (Executive)
Semester : 1st
Date of Submission: 01-February-2020

University of Science & Technology Chittagong

Financial Measures of Performance:
Financial performance measurement is a measure of financial health of a company. These
measures are used to determine that how well a company is using its available resources in
order to generate sustainable revenues and operating income.
There are many ways to measure financial performance, but all measures should be taken in
aggregate. Line items, such as revenue from operations, operating income, or cash flow from
operations can be used, as well as total unit sales. Furthermore, the analyst or investor may
wish to look deeper into financial statements and seek out margin growth rates or any declining
debt. Six Sigma methods focus on this aspect. The financial performance identifies how well
a company generates revenues and manages its assets, liabilities, and the financial
interests of its stakeholders.
Objective of Measuring Performance:
The primary objective of financial record keeping and analysis is to make better business
decisions. Identifying emerging problems and initiating timely corrective action, as well as
identifying potential opportunities for increased profit, are some of the obvious benefits of
financial analysis. Hopefully, ongoing analysis will help the farm manager identify past mistakes
and learn from them by not repeating those same mistakes again.
Financial performance review can help owner/stakeholder to examine their business, goals and
plan effectively for improving the business. When carrying out a financial review of business,
owner/stakeholders should consider below points:

1. Cash flow: This is the balance of all of the money flowing in and out of your business.
You should regularly review and update your forecast. See cash flow management.
3. Working capital: Have your requirements changed? If so, try to determine why and
assess how this compares to the industry standard.
3. Cost base: keep your costs under review. Make sure that your costs are covered in
your sale price - but don't expect your customers to pay for any business inefficiencies. See
how to price your product or service.
4. Borrowing: What is the position of any overdrafts or loans? Can you use cheaper or
more appropriate forms of finance? See borrowing finance for your business.
5. Growth: Do you have plans in place to adapt your financing to accommodate your
business' changing needs and growth? Find out more about financing growth.

One of the most important financial areas you should review is your profitability. This is your
capacity to make a profit, i.e. generate revenue that exceeds your overall expenditure (all costs,
taxes and expenses). Most growing businesses ultimately target increased profits, so it's
important to know how to analyze your profitability ratios.
Profitability ratios typically fall under two broad categories: margins and returns. Most common
profitability ratios are:
1. Gross profit margin: How much money is made after direct costs of sales have been
taken into account, or the contribution as it is also known.
2. Operating expenses margin: This lies between the gross and net measures of
profitability. Overheads are taken into account, but interest and tax payments are not. For this
reason, it is also known as the EBIT (earnings before interest and taxes) margin.
3. Net profit margin: This is a much narrower measure of profits, as it takes all costs
into account, not just direct ones. All overheads, as well as interest and tax payments, are
included in the profit calculation.
4. Return on capital employed: This calculates net profit as a percentage of the total
capital employed in a business. This allows you to see how well the money invested in your
business is performing compared with other investments you could make with it, like putting it in
the bank.

Steps of Financial Performances Measurements:

The Farm Financial Standards Council developed the Financial Guidelines - a set of
recommended standardized farm financial factors, measures and reporting formats farmers can
use to better understand their farm business. The recommended measures for financial analysis
are grouped into five broad categories: liquidity, solvency, profitability, repayment capacity and
financial efficiency. These standard performance measures, sometimes referred to as the
“sweet 16”, are discussed below and their formulas are summarized in Table.

 Liquidity
1. Current ratio = total current farm assets/total current farm liabilities
2. Working capital = total current farm assets - total current farm liabilities
 Solvency
3. Debt/asset ratio = total farm liabilities/total farm assets
4. Equity/asset ratio = total farm equity/total farm assets
5. Debt/equity ratio = total farm liabilities/total farm equity
 Profitability
6. Rate of return on farm assets = (net farm income from operations + farm interest expense -
value of operator and unpaid family labor)/average total farm assets
7. Rate of return on farm equity = (net farm income from operations - value of operator and
unpaid family labor)/average total farm equity
 8. Operating profit margin = (net farm income from operations + farm interest expense - value
of operator and unpaid family labor)/gross revenue
9. Net farm income
 Repayment Capacity
10. Term Debt and Capital Lease Coverage Ratio = (net farm income from operations + total
non-farm income + depreciation expense + interest on term debt and capital leases - total
income tax expense - family living withdrawal)/principal and interest payments on term debt and
capital leases
11. Capital replacement and term debt repayment margin = net farm income from operations +
total non-farm income + depreciation expense - total income tax expense - family living
withdrawal (including total annual payments on personal liabilities) - payment on prior unpaid
operating debt - principal payments on current portion of term debt and capital leases
 Financial Efficiency
12. Asset turnover ratio = gross revenue/average total farm assets
13. Operating expense ratio = operating expense/gross revenue
14. Depreciation expense ratio = depreciation expense/gross revenue
15. Interest expense ratio = interest expense/gross revenue
16. Net farm income from operations ratio = net farm income from operations/gross revenue

Relation in Between ROE, ROA & ROFL:

From a shareholder perspective, return on equity (ROE) is the main summary measure of a
firm’s performance.
ROE measures the return on investment made by a firm’s shareholders, return on assets (ROA)
measures the return earned on each dollar invested by the firm in assets.

ROE measures the return on investment made by a firm’s shareholders, return on assets (ROA)
measures the return earned on each dollar invested by the firm in assets.

The difference between ROE & ROA is referred to as return on financial leverage (ROFL).
ROFL = ROA – ROA
In case, ROFL is large, then we need to look at the liabilities that are high. If debt is high, then
we need to look at cash flows and cash reserves. Cash flow would show us whether the
business can service debt correctly, and cash reserves would tell if the company is prepared for
any eventuality in the future due to which cash flow can be affected on the negative side.
If the accounts payable is a significant component of the company’s liabilities, then the
important ratio that defines financial leverage is Account Payable Turnover (APT).

The smaller the number is better. It indicates better financial leverage as the company uses the
supplier’s money to fund its operations.
ROA can be written as the product of two ratios – Profit margin and asset turnover.

Thus, a firm can increase ROA by growing the profit margin and/or increasing the asset
turnover. Profit margin can be improved by getting better prices or by reducing the various
expenses incurred. A responsive supply chain can allow a firm to provide high value to a
customer, thus potentially getting higher prices. Good supply chain management can also allow
a firm to decrease the expenses incurred to serve customer demand.

The key components of asset turnover are accounts receivable turnover (ART); inventory
turnover (INVT); and property, plant and equipment turnover (PPET). These are defined as
follows:

Another useful metric is the cash-to-cash (C2C) cycle, which roughly measures the average
amount of time from when cash enters the process as cost to when it returns as collected
revenue.

There are two important measures, however, that are not explicitly part of a firm’s financial
statements. They are markdowns and lost sales. Markdowns represent the discounts required
to convince customers to buy excess inventory. Financial statements show only the revenue
receive from sales, not the revenue that “could” have been received. Lost sales represent
customer sales that did not materialize because of the absence of products the customer
wanted to buy. Every lost sale corresponds to product margin that is lost. Both markdowns and
lost sales reduce net income and arguably represent the biggest impact of supply chain
performance on the financial performance of a firm.