Summary
The analysis of operation efficiency of the companies provide much valuable in-formation concerning the financial situation of the business entity. It should not be simplified to just complementation of the enterprise financial condition assessment, because it is a major area where savings may be found, assets structure may be im-proved and the business entity may be evaluated in terms of its liquidity and financial stability.
A multitude of ratios from this area shows that it is very important for assessing the company’s financial health. It provides the essential information about the effec-tiveness of its functioning and effective use of its resources. The well conducted economic analysis of the company’s assets enables to implement changes in the management of fixed assets policy, costs and short-term assets rotation. It is often the answer to the needs of structure changes and improvement of the assets dynam-ics.
The analyzed food processing enterprises have shown relatively high operation efficiency. By examining turnover, cost consumption (material consumption, energy consumption, workload), rotation of selected assets and an analysis of current as-sets coverage in days, the food processing industry have been assessed in view of the whole industrial processing sector.
The most efficient food industries have been indicated, and those ones, which have slight problems with the use of its resources. It has also been attempted to identify some improvements and changes in the asset structure of the analyzed units. Results of operation efficiency ratios have been presented over a period of three years, indicating that in general the year 2008 was not the best year for the food in-dustry. Some problems in interpreting of assets efficiency ratios of the business entity have also been discussed as well as different theoretical approaches to these ratios.
Assessment of operation efficiency is an essential component of a comprehen-sive analysis of the financial health of the business entity not only by enabling to assess the business past. Primarily, it may turn out to be an improvement of current operations and development of future, desirable structure of the assets, so that their use would be the most efficient. This will influence the profitability and liquidity of the business entity and allow for taking up of effective market decisions.
1. Introduction
Financial management is one of the areas of enterprise management and directly influences the effectiveness and efficiency of decisions making in business entity. From the angle of financial performance of the enterprise, its financial health, ability to bring profit, the profitability of the employed assets and return on equity are assessed, in order not only to analyze the economic legacy and evaluate the effectiveness of finance management, but above all, to make future deci-sions considering the enterprise. Ability to assess the economic events occurring in the enterprise, establishing their cause and effect links results in quick and efficient current decisions and the ones considering the future of the organization. Thus, assessment of accuracy of the enterprise operation and efficiency in business, apart from the market dimension is primarily financial.
In the company assessment according to the world standards, much attention is paid to the ra-tio analysis, allowing to assess the company’s financial health. The financial health is, generally speaking, the financial state of the business entity in a specified period of time. The financial soundness of the company is determined by the ability to maintain solvency, profit and asset increase.
The financial health of the enterprise consists of: solvency ratio and degree of indebtedness, financial results, return on capital and equity employed and the company structure. The poor financial health directly affects the operational functioning of the enterprise, hinders its develop-ment, and may even lead to bankruptcy of the enterprise.
Thus, the concept of financial health includes:
- assessment of financial liquidity, e.g. a company’s ability to discharge its current liabili-ties,
- assessment of indebtedness, namely the structure of liabilities and assessment of the company’s ability to discharge its indebtedness;
- assessment of profitability, in terms of sale profitability, assets and return on employed equity of the business entity;
- assessment of the company operation efficiency.
A valuation of the market value of shares and capital is often added to the assessment of the company’s financial health.
Ratio analysis, using different, logically linked ratios, allows for the synthetic assessment of four characteristic business areas: liquidity, financial assistance, turnover and profitability. These areas combined show the financial health of the business entity. Ratio assessment of the financial health of the enterprise is not without drawbacks, however, the methodological problems related to the construction of ratios hinder their correct interpretation. First of all, the proper use of ratios in assessing the company health, is possible only when the enterprise makes use of financial report-ing standards, maintains the principles of financial statements construction and accountreport-ing standards. In addition, ratios’ construction is generally based on the relationship of two values: the numerator and the denominator, of which they may be resources or flows. “The resource (e.g. total assets) is always determined at a certain moment and is expressed in value units. The flows (e.g., income, expenses, profit) are presented in ascending order and having a dimension of time, are expressed in value per unit of time. Relation of resources to resources, like flows to flows, has no dimension and is expressed as multiplicity or a percentage. The most concerns arise in the inter-pretation of the relation of resources to flows or flows to resources. In such case, for the
calculation, the average state of resources shall be adopted, which brings them closer to inclusion of flows.”1
Another area of problem in ratio analysis is the issue of interpretation and assessment carried out by an analyst. Analysis of financial health requires knowledge of the analyst not only about the business entity over time, but also knowledge about the industry and market, on which the busi-ness entity functions. The correct financial assessment of the company must have the reference in time and space, and financial results must be compared to previous years, forecasts for the industry of the analyzed company and in relation to the whole sector. Assessing criteria of ratio level and their changes in time are also important. Like any assessment, ratio analysis must be properly balanced and supported by other analytical tools, and interpretation of ratios must be as objective as possible.
2. The meaning of the company’s operation efficiency
Among mentioned areas of the financial health assessment: liquidity, indebtedness, efficiency and profitability, the least attention is paid to efficiency assessment. Investors and shareholders are particularly interested in profitability, including return on equity, whereas managers, accountants, the company’s financial advisors primarily focus on ensuring the continuity of the executed business processes by maintaining liquidity and solvency, whereas the area assessment of opera-tion efficiency is treated as complementary to the financial health assessment of the business entity. Usually, the operation efficiency assessment results in description of the current situation of the assets of an enterprise, possibly searching for the cause and effect relations at the time of unfavourable assessment, but one does not take up the creative measures improving assets turno-ver, rotation of current assets components, productivity, costs or material consumption.
W. Gabrusewicz says that company’s financial situation is directly dependent on the efficien-cy of its operations, that is the efficient use of its resources in the existing external conditions2. Therefore, speaking of assessment of the operation effectiveness of the company, one must not ignore the ability of the company assets to generate revenues. These revenues will result in later financial results of the business entity, its sales and profitability. J. Czekaj and Z. Dresler3 deter-mine the company’s operation efficiency as an analysis of the use of company assets, saying that the asset utilization ratios characterize the company’s financial position. In turn, B. Pomykalska and P. Pomykalski associate the operation efficiency with entrepreneurial activities. “Operation efficiency ratios (asset management ratios), also known as activity ratios inform about the ability to generate net revenues from the sale by using the company’s resources. In other words, these ratios allow for measuring how efficiently a company manages its assets.”4
Authors cited above notice the link of operation efficiency analysis of the company operation in some aspects with the analysis of the business entity financial liquidity, indicating that the assessment of the operation efficiency, first of all shows, how well the company manages the two specific groups of assets – receivables and stocks, and also assets in general. The management of 1
Sierpi ska M., Jachna T., 2004: Ocena przedsibiorstwa według standardów wiatowych, PWN, Warszawa, p. 145. 2
Gabrusewicz W., 2002: Podstawy analizy finansowej, PWE, Warszawa, p. 239. 3
see: Czekaj J., Dresler Z., 2002: Zarzdzanie finansami przedsibiorstw. Podstawy teorii, PWN, Warszawa, p. 212. 4
receivables and stocks is the key area of the company’s liquidity management. Continuing this analogy, the following may be assumed: if the financial management of the company is limited to activities such as: liquidity management, management of working capital, financial result, taxes, funding, risk and investment management, then the assessment of the company’s operation effi-ciency will be the aspect of working capital and investments management. Indirectly, it is also a part of the liquidity and risk management. Such a wide participation of company’s operation efficiency in the general finance management of the business entity means, that this is an im-portant element not only of finances and financial analysis, but above all, imim-portant in terms of planning, monitoring and ongoing operation of the business.
Thus, the analysis of the company’s operation efficiency in assessment of financial condition allows for:
- presenting the company’s asset’s situation and presenting its components in detail, - an assessment of business activity in the use of their all resources,
- analysis and assessment of individual assets ability to generate income, - turnover assessment expressed in days of individual assets components,
- presenting the load of specific kinds of costs, including assessment of such elements of the enterprise economy as: material consumption, energy consumption, labour consumption and service consumption.
For assessment of operation efficiency the assets turnover ratios are used, rotation ratios (the individual components of current assets), economic activity ratios based on the costs and (accord-ing to some authors) stocks management ratios related to the human potential and measur(accord-ing the effect of work to workload.
3. Assessment of food processing company operation efficiency based on costs
Analysis of food processing companies has been carried out for the period 2005–2009, for compa-nies employing more than 9 employees and covering all areas of assessing the financial condition of the business entity. For the purposes of these considerations, the presentation of ratios is limited to three years. Such areas as financial liquidity, indebtedness analysis, financial assistance, and profitability area have been omitted, focusing exclusively on assessing the food processing com-pany operation efficiency. The analysis has been carried out according to GUS (Main Office of Statistics) financial statements collected on the basis of mandatory, quarterly and half-yearly reports on the revenue, costs, financial results and expenditures on fixed assets, as data resulting from form symbol F-01/I-01. Some ratios for financial analysis were also obtained from the Economy Base – the sector of medium and large enterprises PONT Info Ltd. (www.pontinfo.com.pl).
It is worth noting that food processing companies are a distinct group of companies in the food industry, which in general is an economy industry dealing with the production of intermedi-ate and final products intended for human consumption. The food industry is considered the most widespread and highly differentiated branch of processing industry. There are several branches of the food industry, of which most important are: the meat industry, dairy (including the production of drinking milk, butter, cream, cheese), milling industry, fishing, sugar industry and the confec-tionery industry, fat and oil industry, tobacco and alcoholic beverages industry. According to the PKD (Polish Classification of Business Activity) the food processing is included in Section D
(industrial processing), subsection DA – production of food products and tobacco products. The food and drinks branch include: production, processing and preserving of meat and meat products, processing and preserving of fish and other fishery products, fruit and vegetable processing, production of oils and fats of vegetable and animal origin, production of dairy products, produc-tion of grain mill products, starches and starch products, producproduc-tion of ready made animal fodders, production of beverages and other food products. Production of other products include mainly: pastry and fresh baked goods production, long-life pastry, sugar, cocoa, chocolate, pasta, noodles and alike flour products, tea and coffee processing, production of spices, nutritional and dietetic foods.
The balance of economic prosperity in the food industry (on the basis of the ING Bank Re-port) proved that this sector has fully grasped the opportunities of EU opening markets and economic prosperity. Subsidies and EU financial support for investment and modernization of food enterprises have also been well used. Since 2004 exports have grown rapidly and much financial performance of food processing companies has significantly improved.
In the years 2003–2008 an increase of almost 44% in industrial production of food, drinks and tobacco products has been notified. The largest increase in production occurred in the processing of food of animal origin and in all major sectors of the secondary processing of food and drinks, especially those oriented to foreign markets. Due to the production of bio-fuels a rapid develop-ment of agricultural and food industry processing has also taken place. In turn, the production in branches covered by EU subsidies – quota system (e.g. milk and cereals processing,) has slowed down. The dynamics of growth of agricultural production was several times lower than the produc-tion of the food industry. There was a significant development of the food processing industry. Development trends of the food industry in Poland resulted in a multiple investments in companies of these sectors. It should be noted that the value of investments exceeded 7 billion PLN per year and for the comparison – was about 50% higher than in 2000–2002.
All this has made the Polish food industry recognizable as one of the fastest growing in the whole enlarged EU. Poland was ranked sixth food manufacturer in the EU (in value terms)5.
Number of food processing business entities in the analytical period increases in 2006, in rela-tion to 2005 only, although the total number of industrial enterprises was increasing until 2008. There were not significant decreases in 2005 – 2008, on average by 2 percentage points. The greatest decline, which may be the result of entry of the Polish economy in the economic weaken-ing caused by the global crisis, was reported in 2009, in comparison to 2008. The share of food processing companies consists nearly 20% of all industrial processing business entities and de-creases yearly by 1% during the analyzed period. One fifth of all industrial processing enterprises deal with the production of food and drinks, it is therefore a significant contribution to the overall processing. In turn, the number of employees in food production represents 17% of all workers in industrial processing and stays on a similar level in spite of nearly 3 point decline of all employed in manufacturing in 2008, in comparison to 2007. The specific numbers of business entities, and the number of employees are shown in the tables below.
5
Table 1.1. The number of food processing business entities and dynamics of changes in years 2005–2009
Number of business entities Industrial processing, including: 2005 2006 change [%] 2007 change [%] 2008 change [%] 2009 change [%] 14368 15103 5,1 15354 1,7 15785 2,8 13616 -13,7 Ford and drinks production 2824 2907 2,9 2873 -1,2 2818 -1,9 2299 -18,4 % share of food pro-cessing in industrial processing 19,7 19,3 - 18,7 - 17,9 - 16,9 -
Source: Own analysis on the basis of GUS (Financial results of business entities for 2005, 2006, 2007, 2008, 2009), http://www.stat.gov.pl (22.01.2010).
Table 1.2. The number of food and drinks production employees, dynamics of changes in years 2005–2009
Number of business entities Industrial processing, including: 2005 2006 2007 change [%] 2008 change [%] 2009 change [%] bd. 1919167 2024238 5,5 1976832 -2,3 1762592 -10,8 Food and drinks produc-tion bd. 341004 349097 2,4 339758 -2,7 bd. - % share of food pro-cessing in industrial processing - 17,77% 17,25% - 17,19% - - -
Source: Own analysis on the basis of GUS (Financial results of business entities for 2005, 2006, 2007, 2008, 2009), http://www.stat.gov.pl (22.01.2010).
In practice, for assessment of the operation efficiency, companies select those ratios that best reflect the specific nature of their activities. Generally it is assumed that the ratios of economic activity based on the costs, in the best way evaluate the operation efficiency of production compa-nies, where the share of each type of sale costs reflects the areas of the greatest costs. The overall ratio based on the cost is expressed by a relation of the chosen group of costs to net revenues from sale of goods and materials. Flows included in the numerator and denominator reflect the percent-age share of one value to another. For assessment of manpercent-agement efficiency, the mostly often designated levels are: cost ratio, general cost ratio and overall financial costs ratio. All these ratios should be as low as possible and less than unity (100%). Own cost level ratio indicates what percentage of net sale represent own sale costs, while the ratio of financial costs informs of in-curred financial costs under indebtedness discharge. The most synthetic ratio of the group is general costs ratio, showing the share of overhead costs achieved in the company’s revenues. Their
high and increasing share in the revenues shows low operation efficiency of the business entity and results in difficult financial situation in case of limited market demand6. Overall costs ratio analy-sis of food processing enterprises are shown in table 1.3.
Overall costs ratio in food processing is high and higher than the average in industrial pro-cessing. In addition, in 2008, in all food processing industries an increase of overall costs ratio was notified. Although the ratio in any industry did not exceed a limit of 1 (100% share of revenues), but the level of the ratio should worry producers of oil and fat of vegetable and animal origin (in 2007 was closest to 1) and production, processing and preserving meat and its products. In turn, its value looks favourably in the drinks and other food production, namely the production of bread and fresh pastry products, sugar, cocoa, chocolate and confectionery, tea, coffee and spices. The high rate of overall costs is typical for production operations and means for the enterprise difficul-ties in the case of low product demand. Then, it is more difficult to respond flexibly to changes in the market and introduce production innovations.
In assessment of the economic health, there also appear so-called operational cost consump-tion ratios, which are directly related to current expenditures on producconsump-tion and sales. The operational ratios may make use of calculation scheme or a cost system based on cost kind. Costs calculationally grouped concern a specific calculation unit. „The cost calculation scheme aim is to group the costs in a way, that will enable to assess the size and structure of unit costs and the total cost of production produced and sold”7. The cost calculation scheme substantially divides them into direct costs, i.e. those without any additional conversion can be directly applied to the calcula-tion unit, and indirect costs, which relate to the overall business operacalcula-tion. They are calculated according to the proper keys, dividing into products, units, departments and plants. In production companies the direct costs include direct material and direct labour costs. In turn, the cost system based on cost kind groups homogeneous, in terms of work process, cost components such as materials and energy, external services, taxes, earnings paid to workers, wages, depreciation and other costs. Cost scheme based on cost kind allows for isolating the tangible and intangible costs. The tangible cost include: expenditures on materials and energy consumption, depreciation and tangible services. The intangible costs include: earnings, benefits to employees, taxes and charges, and intangible services.
Relation of appropriate type of group of tangible or intangible costs to sales revenues esti-mates production costs and its examination over the years and its comparison with the ratios in the industry verifies operational efficiency and effectiveness of costs management of business entity. For food processing companies the selected ratios of the load of revenue from the sales of costs by type are shown in Table 1.4.
6
See: Karpu P., 2006: Zarzdzanie finansami przedsibiorstw, UMCS, Lublin, p. 78. 7
Table 1.3. Overall costs ratio including income and costs Total income [mln
PLN]
Total costs [mln
PLN] Overall costs ratio 2006 2007 2008 2006 2007 2008 2006 2007 2008 Industrial processing (total)
7 2 0 1 9 2 ,5 8 3 4 9 7 4 ,7 8 7 8 7 4 1 ,7 6 7 8 2 7 1 ,2 7 8 0 5 5 7 ,7 8 4 5 8 3 5 ,7 0,942 0,935 0,963
Ford and drinks production,including:
1 3 7 7 9 6 ,8 1 5 8 9 7 5 1 6 3 0 1 9 ,8 1 3 1 4 6 4 ,6 1 5 1 5 4 3 ,4 1 5 7 7 1 5 ,4 0,954 0,953 0,967
Production, processing and preserving of meat and its products 3570
8 4 0 1 5 8 ,5 4 1 5 4 5 ,3 3 4 9 3 4 ,8 3 9 1 9 4 ,1 4 1 0 1 7 ,1 0,978 0,976 0,987
Processing and preserving of fish and other fishery products 442
3 ,1 4 7 1 1 ,1 1 5 1 5 0 ,8 2 4 2 7 8 ,4 6 4 5 4 1 ,0 8 5 0 3 8 ,2 4 0,967 0,964 0,978
Processing of fruit and vegetables
1 3 1 6 5 ,1 1 5 3 3 3 ,7 1 3 2 9 5 ,9 1 2 5 5 1 ,2 1 4 7 5 3 ,8 1 3 0 8 6 ,1 0,953 0,962 0,984
Production of oils and fats of vegetable
and animal origin 309
4 ,2 3 9 5 0 ,5 9 5 5 9 6 ,8 9 2 8 6 6 ,1 5 3 9 3 5 ,3 3 5 3 5 8 ,4 9 0,926 0,996 0,957
Dairy products production
1 9 6 2 4 ,7 2 2 8 1 8 ,6 2 2 2 1 1 ,4 1 9 2 4 1 2 1 9 4 8 2 1 9 0 0 ,5 0,98 0,962 0,986
Production of grain mill products, starches and starch products
4 0 2 7 ,4 4 4 9 5 0 ,0 8 5 2 3 1 ,5 2 3 8 3 1 ,3 3 4 6 1 3 ,1 7 5 1 3 9 ,3 4 0,951 0,932 0,982
Ready made animal fodders production
1 0 1 6 1 ,3 1 1 7 5 0 ,2 1 2 4 8 6 ,9 9 7 2 1 ,0 4 1 1 2 4 4 ,1 1 2 1 2 0 0,957 0,957 0,971
Other food products production
2 5 8 0 9 ,4 3 1 0 4 7 ,8 3 1 4 7 3 ,7 2 4 0 0 3 ,7 2 9 0 8 1 ,4 2 9 8 3 6 ,5 0,93 0,937 0,948 Drinks production 2 1 7 8 3 ,7 2 4 2 5 4 ,4 2 6 0 2 7 ,4 2 0 0 3 6 ,9 2 2 2 3 2 ,4 2 4 2 1 9 ,2 0,92 0,917 0,931
Source: own analysis on the basis of GUS (Financial results of business entities for 2006, 2007, 2008), http://www.stat.gov.pl (22.01.2010) and on the basis of Economy Data Base http://www.pontinfo.com.pl (19.06.2010).
Table 1.4. Material consumption, energy consumption and labour consumption in food processing production in selected food industries
Material consumption Energy consumption Labour consumption
2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 Industrial processing (total) 0,499 0,494 0,485 0,02 0,017 0,019 0,099 0,098 0,103
Food and drinks
produc-tion 0,513 0,52 0,514 0,015 0,014 0,016 0,082 0,081 0,083
including:
Production, processing and preserving of meat and its products
0,629 0,623 0,621 0,013 0,014 0,015 0,079 0,079 0,082
Processing and preserving of
fish and other fishery
products
0,641 0,597 0,571 0,01 0,009 0,012 0,083 0,092 0,097
Processing of fruit and
vegetables 0,541 0,56 0,538 0,023 0,214 0,028 0,096 0,097 0,1
Production of grain mill products, starches and starch products
0,598 0,649 0,625 0,026 0,023 0,02 0,056 0,049 0,039
Production of dairy products 0,646 0,645 0,635 0,016 0,015 0,017 0,076 0,072 0,078
Production of grain mill products, starches and starch products
0,545 0,585 0,605 0,025 0,02 0,021 0,08 0,08 0,076
Ready made animal fodders
production 0,517 0,549 0,594 0,014 0,013 0,016 0,053 0,052 0,053
Production of other food
products 0,409 0,414 0,405 0,014 0,013 0,016 0,112 0,112 0,12
Drinks production 0,262 0,276 0,268 0,013 0,012 0,013 0,065 0,06 0,059
Source: Own analysis on the basis of GUS (Financial results of business entities for 2006, 2007, 2008), http://www.stat.gov.pl (22.01.2010) and on the basis of Economy Data Base http://www.pontinfo.com.pl (19.06.2010).
The results of the presented cost consuming ratios suggest high food production efficiency, although the materials used to production consist a half of the revenues earned by these compa-nies. The most material consuming is the production of dairy products, meat processing and production and processing and preserving of fish. The lowest material consuming is the production of drinks. In view of the entire industrial processing, material consumption is not much higher than the average in industrial processing. In addition, during the analyzed period the material consumption slightly declines in all food processing industries. Energy consumption is lower than the average in industrial processing, although due to rising energy costs, it increases year by year.
The least energy consuming is production and preserving of fish. In turn, the most energy consum-ing is production of oils and fats of vegetable and animal origin.
The share of wages costs, including overheads in total revenues in the analyzed period in-creases in each industry, although in the food processing it is lower than the average in industrial processing. It should be noted that the employment itself decreased steadily year by year in the analyzed period, which would mean that, along with a reduction in employment, production workers’ salaries increased. The lowest share of wages costs in revenues were noticed in compa-nies producing oils and fats of vegetable and animal origin, the highest – in processing of fruits and vegetables and other food products.
Generally, high operation efficiency measured by the share of the costs in revenues indicates that food processing companies demonstrate a low absorption of different types of costs, which has its direct impact on achieving a high return on sales. In turn, the share of cost is relatively high and higher than the average in industrial processing. It is therefore necessary to consider the situation, when the costs depending on type, are relatively correct and beneficial to the business entity, and a ratio of overheads is dangerously approaching 1. This should be a signal for starting searching for savings in indirect costs, general and financial costs.
In assessment of operation efficiency, apart from analysis based on cost, financial condition is reflected by the ratios of assets utilization and turnover ratios (for the period), calculated as turno-ver for a year or in days.
4. Analysis of rotation and asset utilization of food processing enterprises
Knowledge about the use of individual assets of the enterprise allows for assessing its opera-tion efficiency from the angle of assets employed in the producopera-tion and sales. This in turn allows for making the right decisions considering the level and asset structure of the business entity. On one hand, reducing the company’s assets leads to lower costs of their financing, including a reduction in level of involvement of capital and indicates their high efficiency. On the other hand, a certain level of assets is necessary to maintain production, sales and to rapid and effective responding to short and long-term increases in demand. Efficiency of resources use in a typical assessment of operation efficiency is measured in their reference to sales revenues. „Their essence is consideration of relation between the appropriate dynamic ratio, expressing income from the sales in gross prices, net or in their own costs, and the static ratio (denominator), reflecting average amount of assets components employed in the operations. Such relation, in production operation conditions (industrial or transportation) is also referred to as assets productivity ratios. The diverse relation is known as assets involvement ratio.”8
Thus, depending on the denominator of the calculated ratio, it will respectively be: by substi-tuting balance sheet total – total assets turnover ratio or in other words asset turnover ratio, with the substitution of fixed assets – fixed assets productivity ratio (fixed assets turnover), with the substitution of current assets – turnover ratio of fixed assets turnover.
The author cited above lists all the operation efficiency ratios in the area of turnover: total as-sets turnover ratio, engagement of asas-sets ratio, fixed asas-sets turnover ratio with a derivative of engagement of its assets ratio, current assets turnover with a derivative of engagement of its assets, 8
tangible assets turnover, working capital turnover, inventory turnover with a derivative of their engagement ratio and stock turnover in days, receivables turnover, average collection period of receivables.
The selected food processing enterprise assets turnover ratios are presented in table 1.5. Table 1.5. The selected food processing production turnover in the analyzed food industry
Total assets turnover Fixed assets turnover Current assets turnover Share of fixed assets in total revenues 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 Industrial pro-cessing (total) 1,50 1,51 1,46 2,95 2,98 2,84 3,11 3,11 3,06 0,27 0,26 0,27 Food and drinks
production 1,72 1,74 1,71 3,27 3,33 3,22 3,66 3,72 3,77 0,25 0,24 0,25
including:
Production,
pro-cessing and
preserving of meat and its products
2,61 2,58 2,62 4,28 4,18 4,38 6,77 6,84 6,65 0,21 0,20 0,20
Processing and
preserving of fish and other fishery products
1,99 1,71 1,55 4,26 3,38 3,58 3,79 3,51 2,77 0,21 0,24 0,25
Processing of fruit
and vegetables 1,24 1,28 1,14 2,72 3,04 2,47 2,32 2,23 2,16 0,29 0,26 0,33
Production of oils and fats of
vegeta-ble and animal
origin 1,02 1,33 1,54 2,79 3,25 3,71 1,64 2,28 2,68 0,28 0,24 0,20 Dairy products production 2,38 2,48 2,32 4,42 4,84 4,43 2,68 5,16 4,98 0,22 0,20 0,21 Production of grain mill products,
starches and starch products
1,3 1,43 1,6 2,36 2,78 2,88 2,93 2,97 3,66 0,37 0,31 0,31
Ready made animal
fodders production 1,99 2,2 2,34 5,11 5,57 5,7 3,32 3,70 4,28 0,15 0,14 0,16
Production of other
food products 1,27 1,28 1,27 2,53 2,54 2,36 2,57 2,64 2,81 0,31 0,30 0,34
Drinks production 1,56 1,55 1,49 2,57 2,5 2,47 4,03 4,10 3,80 0,29 0,27 0,28
Source: Own analysis on the basis of GUS (Financial results of business entities for 2006, 2007, 2008), http://www.stat.gov.pl (22.01.2010) and on the basis of Economy Data Base http://www.pontinfo.com.pl (19.06.2010).
First of all, it should be noted that total assets turnover, both fixed assets, and turnover assets in general is higher than the average in food processing industry. A general trend of slight assets turnover decrease in 2008 in almost all sectors of food is also noted. However, asset turnover itself is not high in food processing, an average of 1 PLN assets involved in the year earned less than 2 PLN of total revenues. In turn, the fixed assets in the industry turned in revenue of 3 times on average. The highest turnover ratio in the analyzed period was reached in the production of ready made animal fodders and dairy products. Current assets were rotating the fastest in production, processing and preservation of meat and meat products, and the slowest in fruit and vegetables processing and the production of oils and fats of vegetable and animal origin. At the same time it is worth noting that the high productivity of fixed assets in production of ready made animal fodders has had the lowest share of fixed assets in total sales. High and rising average involvement of fixed assets, showed the following industries: fruit and vegetables processing and the production of grain mill products, starches and starch products.
In the interpretation of the fixed assets turnover ratio and share ratio of fixed capital in total revenue one may not ignore the problem of valuation of fixed assets, taking into account the current level of inflation. In a situation of high inflation rates, prices of fixed assets do not reflect their actual value. And this requires a revaluation of enterprises’ assets components and cautious interpretation of the employed fixed assets ratio over a longer period of time, in which the inflation fluctuations might have had place9.
L. Bednarski recommends supplementing the initial assessment of the effectiveness of assets utilization ratio by comparing the revenues dynamics ratio from sales with assets dynamics ratio. The higher growth degree of sales revenues dynamics ratio than the assets dynamics ratio, indi-cates an increase in the management effectiveness of the enterprise assets10, whereas the diverse situation indicates decrease in management effectiveness of the enterprise assets. The authors of Analiza ekonomiczno-finansowej przedsibiorstwa (Enterprise economic-financial analysis) suggest supplementing the analysis of fixed assets utilization with effectiveness of fixed assets analysis. The synthetic measurement of fixed assets effectiveness, in general, is economic variable showing the relation of the described enterprise target function level to expenditures on fixed assets necessary to execution of this function. Because the basic aim of business entities is gaining maximum profitability, as a general measure of fixed assets effectiveness one may adopt the relation of net financial result (net income) to average value of fixed assets.11
Defined in this way ratio is nothing else but profitability ratio, considered in the subject litera-ture as an area of profitability in assessing the financial condition of the enterprise. In turn, profitability does not fit in the issues of assessing efficiency of the business entity, and designates another range of assessment of financial condition of the enterprise. Hence, the analysis of the effectiveness of the fixed assets of the authors cited above is a bit different in comparison to commonly accepted areas of economic-financial analysis.
Asset management analysis according to M. Krajewski designates financial efficiency in the enterprise, and asset management efficiency issues, both fixed and rotating, primarily require 9
for more, see: Czekaj J., Dresler Z., 2002: Zarzdzanie finansami przedsibiorstwa..., op. cit. p. 214. 10
see: Bednarski L., 1999: Analiza finansowa w przedsibiorstwie..., op. cit. p. 89–90. 11
for more, see: Skowronek Cz., 2004: Analiza ekonomiczno – finansowa przedsibiorstwa, University of Maria Curie-Skłodowskia, Lublin, p. 66 and later.
examining the structure and dynamics of individual components of the company’s assets. “Chang-es in fixed assets shall be taken as a r“Chang-esult of economic decisions related to the flexible adjustments of enterprises’ economic activity to the market needs”. Any such change causes a qualitative change in the structure of total assets”12. The author considers an assessment of assets management efficiency as thorough analysis of the assets structure and dynamics of change. But at the same time points (referring to publications by W. Janasz and others) that the correct analysis of the enterprise operation effectiveness requires the adoption of appropriate methodological princi-ples and applying appropriate research methods that would enable13:
- a comprehensive assessment of asset management,
- separating the impact of the utilization degree of assets in achieving financial results, - disclosure of existing reserves in fixed assets and indicating the possibility of their
ra-tional use,
- defining the appropriate relations between workloads, and the amount of products gained due to this workload,
- predicting the volume of production, depending on the taken decisions, considering the technical, economical and organizational assumptions.
The turnover ratios include also the turnover ratios of current assets components such as stocks and receivables. Stock rotation ratio is designated as the relation of net sales to average stock value and is interpreted as an answer to the question: how many times during the analyzed period there were renewals of stocks in a financial sense. The situation of increasing stock turno-ver ratio is generally favourable for the company, since it means a quick conturno-version of stock into sales, reducing the cost of their financing, cost of capital freezing, warehousing costs, and the risk of decrease in value of the usable products. On the other hand, with reduced stock levels, and thus a higher stock rotation, there may be increased ordering and purchase costs and costs of supplies of raw materials for production. Also increases the risk of stock shortage, deterioration of production cycle, and in case of finished products stocks – the risk of losing customers waiting for the realiza-tion of the contract14. Receivables turnover ratio, analogically to the stocks rotation ratio, calculated as the relation of revenues to average receivables level, means how many times during the turnover year it renews its receivables. “According to western standards, this ratio should range between 7.0 and 10.0. If this ratio is lower than 7.0, such a situation may mean that in relation to generally accepted standards, a company offers credits to their customers for too long, which proves that the funds in the receivables are frozen for too long. ”15
The theory and practice of operation efficiency assessment recommends partial calculation of stocks and receivables ratios. For stocks there are the following rotation ratios:
- stocks of finished goods, - materials stocks,
- stocks of work in progress.
“Each of these stocks should be associated with different flows of costs. Therefore, for the 12
Krajewski M., 2006: Zarzdzanie finansowe w przedsibiorstwach. Zasady, efektywno, narzdzia. Orodek Doradztwa i Doskonalenia Kadr Sp. z o.o., Gda sk, p. 56.
13
Ibidem: p. 62. 14
see: Sierpi ska M., Jachna T., 2004: Ocena przedsibiorstwa według…, op. cit. p. 184. 15
stocks of finished goods, the proper flow are production costs, for materials stocks – the cost of material consumption, and for work in progress – the technical costs of production.”16
In turn, for the receivables an additional liquid assets turnover ratio is added, calculated as the relation of net sales to average total receivables and short-term investments. Rotation ratios also include: the capital rotation, own constant capital and total receivables rotation. Equity turnover ratio, measured by the relations of net sales revenues to average equity, informs about what sales generates 1 PLN of employed equities. Rotation equity ratio informs about relation of net sales income in comparison to constant capital, e.g. the total of own and other capital and shows how efficiently a company uses its constant capital. It is very important due to the fact that constant capital is mainly used for financing the development of the enterprise. The total receivables ratio in general is complementary to the analysis of indebtedness and indicates the company’s ability to its discharge. The higher level of receivables rotation, the better the business entity discharges its borrowings and more efficiently uses receivables.
In the interpretation of the ratios of the assets utilization the analysts are looking for simple solutions, responding on the basis of the calculated ratios how many times, on average, assets have been traded for achieving given value of earnings in the period under review. The more turnovers, the greater rotation of the said assets and the more effectively the rated asset component is used. This turnover indicates a financial aspect of the assets and their major types, rather than technical – organizational assets exchange in the sale17. It is therefore easier to express the rotation of the individual components, mainly turnover assets in time unit, and not in number of turnovers per year. Therefore the ratios expressed in days have been accepted, in other words: current assets coverage ratios in days. Among them, the most often calculated and interpreted are: stock conver-sion cycle length and the average period of debt collection. These ratios are calculated by substituting the numerator, respectively, the average inventories or receivables, and the denomina-tor the average daily sales, or sales revenue divided by the number of days per year.
Analyzing stock turnover one may notice the tendency to shorten their conversion cycle, which is a favourable fact especially in food industry and may be the result of food production special features (except for: the production of oils and fats of vegetable and animal origin, where the rotation cycle exceeds 90 days and fruits and vegetables processing, where the rotation cycle of stocks is 90 days). Furthermore, the average stocks turnover in food industry is higher than the average in industrial processing. Rapid conversion of stocks is characterized by the production of drinks (19 days) and production, processing and preserving of meat and meat products (15 days). Companies producing food products in analyzed years showed a relatively short period (in relation to production companies) of debt collection, in particular meat processing and oils and fats produc-tion, though ratios show unfavourably rising trend here. Companies processing and preserving fish and other fishery products and vegetable and fruit processing and production of other food prod-ucts get their receivables paid in the longest period of time. „The increase in receivables in the enterprise may be an advantageous phenomenon in case it leads to an increase in sales (...). At the same time the company is interested in shortening the period of debt collection, because faster
16
Gabrusewicz W., 2002: Podstawy analizy finansowej…, op. cit., p. 242. 17
inflow of cash (...) improves its liquidity”18. The detailed current assets coverage ratios in days for the analyzed companies illustrates Table 1.6.
Table 1.6. The chosen ratios of current assets coverage in days
Stock turnover [in days]
Average period of debt collection
[in days]
Average period of debt payment [in days]
2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 6 2 0 0 7 2 0 0 8
Industrial processing (total) 37,2 38,8 38,7 56,9 54,4 55 82,64 80,76 85,44
Food and drinks production 34,6 35,9 33,1 47,6 47,2 49 76,18 76,09 76,26
including:
Production, processing and
preserving of meat and its products
12,8 13,6 14,7 32,8 32,9 33,2 50,74 52,59 53,15
Processing and preserving of
fish and other fishery products 33,1 32,5 37 56,8 60,3 82,4 79,48 85,16 111,22
Fruit and vegetable processing 76 86,7 88,4 60,1 58,3 66,5 108,6 113,3 137,98
Production of oils and fats of
vegetable and animal origin 129 89,1 93 49,4 43,6 28,8 155 115,9 125,82
Dairy products production 18,8 22 20,6 39,5 38,5 40,4 54,92 52,4 50,27
Production of grain mill
products, starches and starch products
58 59,9 46,1 55,4 53,8 47,3 104,1 111,3 91,45
Ready made animal fodders
production 33,3 29,9 22,8 57 51,8 44,8 63,64 52,96 44,72
Production of other food
products 56,7 55 44,2 59,3 60,7 64,5 90,92 92,16 80,71
Drinks production 16,5 19,4 19,5 49,7 49,1 53,8 88,81 88,98 91,4
Source: Own analysis on the basis of GUS (Financial results of business entities for 2006, 2007, 2008), http://www.stat.gov.pl (22.01.2010) and on the basis of Economy Data Base http://www.pontinfo.com.pl (19.06.2010).
18
Rotation in days may be also expressed by basic rotation ratios, which results from the formu-las transformation. Therefore, conversion cycle in days may be calculated for: stocks of materials, work in process inventories and stocks of finished products. One of the additional rotation ratios in days is average period of debt repayment. Debt repayment period ratio indicates what is the average time of debt repayment of the enterprise. Generally, the extended deadlines for debt repayment have positive aspects. A detailed analysis of receivables and liabilities designates working capital management strategy. It is worth noticing, that food processing companies have a longer term liabilities repayment, and collect debts faster. This is part of an aggressive manage-ment strategy of working capital.
Knowledge of the inventory turnover ratio in days, debt collection and receivables period sets the cash cycle. It is calculated by the formula: from the total stock rotation ratio in days and average period of debt collection, one should deduct the average period of debt payment in days. The shorter cash cycle, the more beneficial it is for the enterprise.
In the analyzed companies the longest cash cycle had production of other food products com-panies and producing ready made animal fodders (28 and 23 days). In turn, very good cash cycle has made the production of drinks (-18 days) and the production of meat and meat products, oils and fats of vegetable and animal origin (-5 days). The average of this cycle in the food industry was very good (6 days) and more favourable than the average in industrial processing (8 days).
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[1] Bednarski L., 1999: Analiza finansowa w przedsiĊbiorstwie, PWE, Warszawa.
[2] Czekaj J., Dresler Z., 2002: Zarządzanie finansami przedsiĊbiorstw. Podstawy teorii, PWN, Warszawa.
[3] Gabrusewicz W., 2002: Podstawy analizy finansowej, PWE, Warszawa. [4] Gabrusewicz W., 2005: Sprawozdawczo finansowa, WSHiR, PoznaĔ. [5] KarpuĞ P., 2006: Zarzdzanie finansami przedsibiorstw, UMCS, Lublin.
[6] Krajewski M., 2006: Zarzdzanie finansowe w przedsibiorstwach. Zasady, efektywno, narzdzia, OĞrodek Doradztwa i Doskonalenia Kadr Sp. z o.o., GdaĔsk.
[7] Pomykalska B., Pomykalski P., 2007: Analiza finansowa przedsibiorstwa, PWN, Warszawa. [8] Skowronek Cz., 2004: Analiza ekonomiczno-finansowa przedsiĊbiorstwa, UMCS, Lublin. [9] SierpiĔska M., Jachna T., 2007: Ocena przedsiĊbiorstwa według standardów Ğwiatowych,
PWN, Warszawa.
[10] Wojewoda I., 2010: Analiza sprawnoci działania przedsibiorstw przetwórstwa przemysłowego w latach 2007–2009, [l:] Zarzdzanie finansami. Analiza finansowa i zarzdzanie ryzykiem, Szczecin University, Szczecin.
[11] Financial results of non-financial enterprises in 2005, 2006, 2007, 2008 and 2009, GUS (The Main Statistical Office) publications, http://www.stat.gov.pl (22.01.2010).
[12] http://www.pontinfo.com.pl (19.06.2010). [13] www.protalspozywczy.pl (23.04.2010). [14] http://www.stat.gov.pl (22.01.2010).
SKUTECZNO DZIAŁANIA PRZEDSIBIORSTWA W OSZACOWANIU/OCENIE KONDYCJI FINANSOWEJ NA PRZYKŁADZIE ANALIZY PRZETSIBIORSTW
PRZETWÓRSTWA SPO YWCZEGO Streszczenie
Analiza skutecznoci działania przedsibiorstw dostarcza wiele wartociowych informacji odnoszcych si do finansowej kondycji poszczególnych jednostek bizne-sowych. Jednoczenie nie jest zadaniem łatwym oszacowanie finansowej kondycji przedsibiorstwa, gdy stanowi to główny obszar, w którym mog si znale osz-czdnoci, a take moe by usprawniona struktura aktywów. Ponadto, dana jednostka biznesowa moe zosta oceniona pod wzgldem płynnoci oraz finansowej stabilnoci. Analizowane przedsibiorstwa zajmujce si przetwórstwem spoywczym wy/ukazuj stosunkowo wysok skuteczno działania. Poprzez sprawdzenie obrotu, poniesionych/zuytych kosztów (zuycie materiałów, zuycie energii, obcienie ro-bocze), obrotu wybranych aktywów oraz analizy pokrycia biecych aktywów w dniach, przemysł przetwórstwa spoywczego jest oszacowany z punktu widzenia całego sektora przetwórstwa przemysłowego. Wskazane zostały najbardziej skutecz-ne przedsibiorstwa zajmujce si przetwórstwem spoywczym oraz te, które posiadaj nieznaczne problemy ze zuyciem swoich zasobów. Ponadto, zidentyfiko-wano moliwe obszary usprawnie oraz zmiany w strukturze aktywów analizowanych jednostek. W efekcie przeprowadzonych działa zaprezentowano współczynniki efektywnoci z okresu 3 lat, wskazujce na fakt, e rok 2008 nieko-niecznie był rokiem najlepszym dla przetwórstwa spoywczego. Dodatkowo, przedstawiono wiele problemów zwizanych z przedstawieniem współczynników efektywnoci aktywów poszczególnych jednostek biznesowych, jak równie zaprezen-towano róne podejcia teoretyczne odnoszce si do przedstawionych współczynników. Oszacowanie skutecznoci działania stanowi istotny składnik ob-szernej analizy kondycji finansowej poszczególnych jednostek biznesowych, nie tylko poprzez umoliwienie oceny w oparciu o przeszło danych jednostek. Przede wszystkim moe to powodowa popraw biecych działa oraz dalszego rozwoju przedsibiorstwa, w efekcie dostarczajc podanej struktury aktywów, po to aby ich wykorzystanie było jak najbardziej skuteczne/efektywne. Moe to wpłyn w znacz-cy sposób na dochodowo oraz płynno przedsibiorstwa, pozwalajc tym samym na podejmowanie skutecznych decyzji marketingowych.
Słowa kluczowe: analiza finansowa, przedsiĊbiorstwa przetwórstwa spoĪywczego, wyniki finansowe przedsiĊbiorstw przetwórstwa spoĪywczego
Izabela Wojewoda
Instytut Zarządzania i InĪynierii Rolnej
PaĔstwowa WyĪsza Szkoła Zawodowa w Sulechowie ul. A. Krajowej 51; 66-100 Sulechów
