The Analysis and Interpretation of Management Efficiency


Learning Activities Unit 4 – The Analysis and Interpretation of Management Efficiency
Unit 4 – The Analysis and Interpretation of Management Efficiency
Unit Introduction
Efficiency ratios can be of use in the analysis and interpretation of the manner in which various resources have been used and managed.
Working capital can be defined as current assets less current liabilities. The management of working capital is a crucial aspect of the efficient
management of a business.
Whilst this unit is concerned with management efficiency, it should be noted that there is a crucial link between the efficient use of business
resources and profitability. If resources are used effectively, then this should contribute to effective financial performance.
Aspects of the ratios that can be used to understand management efficiency can also be linked to the analysis and interpretation of liquidity: this
will be considered in the next unit.
Unit 4 – The Analysis and Interpretation of Management Efficiency
End of Unit Activity
20×0 20×1
£’000s £’000s £’000s £’000s
Sales 5,250 7,000
Less: cost of goods sold:
Opening stock 890 910
Add: purchases 3,695 6,195
4,585 7,105
Less: closing stock (910) (3,675) (1,785) (5,320)
Gross profit 1,575 1,680
For the end of unit activity we will return to Northern Housing Limited.
Remember that company has been a family owned concern, operating principally in the north of England. Northern Housing Limited financial
year end is the 31 December. Recent corporate strategy has been focused on growth, and the directors had targeted an increase in sales
turnover of 50% for financial year 20×1. At the start of their 20×1 financial year significant capital investment took place as the company
commenced new building projects in both Central Scotland and Northern France.
A summary of the company’s most recent financial statements covering the last two years of operations is shown below.
Northern Housing Limited
Summerised Trading, Profit and Loss Accounts
Sarah Almotawaa
Less: expenses 998 1,085
Earnings before interest and tax 577 595
less: corporation tax provision 115 145
Profit after tax 462 450
Less: ordinary dividend proposed 280 175
Retained profit for the year 182 275
Add: profit and loss balance at 1 January 576 758
Profit and loss balance at 31 December 758 1,033
20×0 20×1
£’000s £’000s £’000s £’000s
Non current assets: @ net book value 4,690 5,678
Current assets
Stock / inventories 910 1,785
Trade debtors / receivables 955 1,515
Bank 368 2,233 _____ 3,300
Current liabilities
Trade creditors / payables 805 1,785
Proposed dividend 280 175
Corporation tax 115 145
Bank overdraft _____ (1,200) 875 (2,980)
Net current assets 1,033 320
Non current liabilities
10% Debentures (1,225) (1,225)
Net assets 4,498 4,773
Capital and reserves
Northern Housing Limited
Balance Sheets
3.5m. Ordinary shares of £1 each 3,500 3,500
Retained earnings 758 1,033
General reserve 240 240
Total equity 4,498 4,773
inventory turnover period
receivables collection period
payables settlement period
turnover of capital employed
asset turnover
non-current asset turnover
current asset turnover.
From the above financial statements of Northern Housing Limited calculate management efficiency ratios for both 20×0 and 20×1
You should calculate the following ratios:
Please post your responses to your journal.