22-10-2016, 10:21 AM
Analysis of Managerial Efficiency with the help of Accounting Ratio: A Study of selected FMCG Companies
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Abstract
Management is interested about profitability and financial management. Managerial efficiency can be ascertained by analyzing financial condition of a firm. The inter-relationship that exists among the different items appeared in the financial statement are revealed by accounting ratios. The ratios are the best tool for measuring liquidity, solvency, profitability and management efficiency of the selected companies with the help of accounting ratios. The data has been selected from the secondary sources for a period of ten years from 2002-03 to 2011-12. Various statistical tools have been applied like average, standard deviation, coefficient of variance.
Introduction
The main object of all the business concern is to earn profit. Profit is the measurement of efficiency of the business. The stakeholders of the company are mainly interested in the profitability of the company. Whether a firm is profitable or not, it is the case of managerial efficiency. It is the managerial activities which indicate how efficiently the working capital and stock is being used to obtain sales. The shareholders and management of the concern may often feel interested to know whether the financial position of the firm is stable enough or not. A firm with financial stability has all the potentials of future growth.
Financial ratios are used to measure managerial efficiency. The management may be willing to make a self-appraisal of past performance. The owners and shareholders may also want to assess the efficiency of managerial activities. As the managers are directly related to all activities of a firm, therefore, many parameters must be tested for measuring its efficiency. Accounting ratios may serve many purposes; they can assist management in its basic function- forecasting, planning, coordination, control and communication. If these are properly used then they can improve efficiency and therefore profits. Ratios indicate trends of cost, sales, profit and other relevant facts and thus they may be very useful for forecasting likely events in the future. The future plans can be guided by the ratios. Ratios may be used as measures of efficiency. This can be helpful for financial position of similar firms through inter-firm comparison. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements, so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. There are number of ratios which measure the managerial efficiency of a firm. Not only the profitability but also the solvency position of a firm explores the managerial efficiency. For example debt-equity is used to make a thorough analysis of long-term solvency, capital structure and risk, financial stability and managerial efficiency. A very low debt-equity ratio indicates a sound long term solvency, low risk, conservative capital structure, low profitability and inefficient managerial efficiency. Such a situation reveals that the management has failed to take advantage of debt capital. Profitability measurement also reveals the managerial efficiency. For example a high grow profits ratio indicates more profitability and managerial efficiency. Therefore, it is important to say that ratios indicating profitability, use of assets, capital structure analysis reveals the managerial efficiency of a firm.
Objective of the study
The main objective of the paper is to analyze the managerial efficiency in relation to the financial performance of selected FMCG companies. In addition, it also aims at understanding the trend of performance during the period of study.
Methodology and Data Collection
The study has been conducted for a period of ten years from 2002-03 to 2011-12. For the purpose of the study five FMCG companies have been selected. The data was collected from the annual reports and accounts of the selected companies. Various books and journals have been consulted in support to the data collection. Various accounting ratios like Debtors’ Turnover, Creditors’ Turnover, Stock Turnover, Capital Turnover, Fixed Assets Turnover and Profit to Capital Employed.