NATIONAL ECONOMICS UNIVERSITY CỘNG HÒA XÃ HỘI CHỦ NGHĨA VIỆT NAM FACILITIES ECONOMICS Độc lập – Tự do – Hạnh phúc Hanoi, August 20, 2022 COURSE PROJECTS Topic FACTORS IMPACTING ON THE BUSINESS EFFICIE.
Trang 1NATIONAL ECONOMICS UNIVERSITY CỘNG HÒA XÃ HỘI CHỦ NGHĨA VIỆT NAM FACILITIES: ECONOMICS Độc lập – Tự do – Hạnh phúc
Hanoi, August 20, 2022
COURSE PROJECTS
Topic:
FACTORS IMPACTING ON THE BUSINESS EFFICIENCY OF ENTERPRISES
Student's first and last name: Nguyễn Thanh Thảo Student code: 11203678
Class: Financial Economics FE62A Major: Financial Economics
Ha Noi
Trang 2LIST OF ACRONYMS
ROS: Return on Sales
ROA: Return on Assets
ROE: Return on Equity
EBIT: Earnings before interest and taxes CCC: The cash conversion cycle DIO: Days of inventory outstanding DSO: Days sales outstanding DPO: Days payables outstanding COGS: Cost of goods sold
AR: Accounts Receivable
AP: Accounts Payable
GDP: Gross Domestic Product DFL: Degree of Financial Leverage
CR: Current Ratio
QR: Quick Ratio
Trang 3CHAPTER I INTRODUCTION 1.1 The urgency of the subject
Economic researchers and business executives are both concerned about efficiency As we all know, the goal of an enterprise's business activities is to make profits or, more broadly, to increase economic efficiency in its business activities Business efficiency reflects the level of use of an enterprise's resources to achieve maximum efficiency Profits provide enterprises with the means to reproduce and
Trang 4expand production Since then, it has not only created conditions to improve the lives
of enterprise employees, but it has also improved conditions to serve customers and fulfill State obligations As a result, it is necessary for any business and managers to evaluate the efficiency of production and business activities in order to identify the factors affecting the efficiency of production and business activities, and to take appropriate measures to promote positive factors and limit negative factors
Businesses must improve the efficiency of their production and business activities for the national economy because it contributes to the rational allocation of national resources, avoiding waste when other resources are limited The efficiency of production and business activities is a critical factor in the survival and growth of any business Because market share is divided in a fiercely competitive market economy with many businesses providing products and services, businesses must find ways to increase the results obtained per unit of cost
Employees value the efficiency of production and business activities because
an effective business provides good conditions for employee care, such as a satisfactory salary regime, good working conditions, and appropriate employee policies Thus, production and business activity efficiency also has the meaning of motivating employees
In short, any business operating in any industry or field will face challenges in today's fiercely competitive environment As a result, all businesses must develop their own business objectives Financial management's goal is to maximize the value
of the owner's assets Improving business efficiency is beneficial not only to businesses but also to society as a whole How can capital and other enterprise resources be used more effectively? Enterprises must have policies and strategies in place so that they can grow and achieve their objectives despite external and internal factors For these reasons, when it comes to business performance, I only consider economic efficiency in this study.This research looks at the impact of various factors
on the efficiency of production and business activities of enterprises listed on the Vietnamese stock exchange, such as demographic factors and external and internal factors
Trang 51.2 Objectives of the study
The purpose of this research is to identify the factors influencing the business performance of enterprises The goal of this research is to provide a better understanding of the factors that influence business performance and increase the chances of success for enterprises At the same time, it establishes a process for researching, collecting, processing, and formulating hypotheses, as well as proposing research models on factors influencing on efficiency of production and business activities of enterprises
1.3 Research question
- What is the efficiency? What is the financial efficiency of enterprises?
- What factors affect efficiency of production and business activities of enterprises?
CHAPTER II THEORETICAL BASIS ON BUSINESS EFFICIENCY 2.1 Definition
2.1.1 Definition of ‘'efficiency'’
Efficiency is the desired outcome that produces the results that people expect and strive for; it varies in different areas In the manufacturing industry, efficiency means productivity In business, efficiency equals profit Labor efficiency is labor productivity in general, which is measured by the amount of time it takes to produce a unit of product or the number of products produced in a unit of time
Relative measurement efficiency
Efficiency =
Absolute measurement efficiency:
Efficiency = Outputs – Inputs
In this formula, it shows the number of input units per output unit Then, business managers can decide how much to save or invest in resources
Indicators such as total net revenue, total profit, gross profit, and so on are used
to measure output factors Labor, machinery and equipment, raw materials, equity, loans, and other input factors are examples of input factors
2.2.2 Definition of ‘’financial efficiency of enterprises’’
Financial efficiency refers to a company meeting all of its goals of providing high-quality service at the lowest possible cost It can be calculated by calculating the percentage of revenue spent on expenses Finance efficiency can be achieved by using
Trang 6technology to simplify standardized processes and consolidating or eliminating non-core activities through outsourcing
2.2 Measurement
2.2.1 ROS
Return on sales (ROS) is a ratio used to evaluate a company's operational efficiency An increasing ROS indicates that a company is improving efficiency, while
a decreasing ROS could signal impending financial troubles ROS is closely related to
a firm's operating profit margin
ROS = =
This ratio reflects how much profit makes up the percentage of revenue from the enterprise's production and business activities, or in other words, how much profit
is generated by one dollar of revenue This ratio is positive, indicating that the company is profitable, and the higher the ratio, the more profitable the company is On the contrary, this ratio is negative, indicating that the enterprise's production and business activities are losing money
This ratio is influenced by the enterprise's selling price and production cost; if the selling price is high or the manager manages production and business expenses effectively, or both, this ratio will be high If, on the other hand, this ratio falls, it could be because the enterprise is losing control over production and business costs,
or because the enterprise
Stanwick's 1998 study also showed that the rate of return on sales (ROS) is a financial indicator to measure the business performance of an enterprise
2.2.2 ROA
Return on assets (ROA) is a financial ratio that measures how profitable a company is in comparison to its total assets ROA can be used by corporate management, analysts, and investors to determine how efficiently a company uses its assets to generate a profit
ROA =
This indicator reflects how much net profit per dollar of assets If this ratio is greater than 0, it shows that the business is profitable The higher this ratio, the more efficient the enterprise is in production and business activities and vice versa
Trang 7McGuire et al., 1988; Russo and Fouts 1997; Stanwick and Stanwick, 2000; Clarkson et al., 2008 use return on total assets (ROA) as a measure to measure business performance of enterprises In another study by Cohen, Chang and Ledford (1997) shared the same opinion, using ROA as a measure to measure business performance
2.2.3 ROE
Return on Equity (ROE) is the percentage of a company's annual return (net income) divided by the value of its total shareholders' equity ROE can also be calculated by dividing the firm's dividend growth rate by its earnings retention rate
Return on Equity combines the income statement and the balance sheet, comparing net income or profit to shareholders' equity The total return on equity capital represents the firm's ability to turn equity investments into profits To put it another way, it measures the profits made from shareholders' equity for each dollar invested
ROE =
This indicator reflects how much profit is generated for every dollar spent, or the ability of a dollar of capital to generate business results The greater the efficiency
of capital use, the greater an enterprise's production and business efficiency
Managers can raise this target by increasing their competitiveness in order to increase revenue while decreasing costs and increasing net profit Either the business uses assets more efficiently by increasing asset turnover, or the business increases this ratio by needing to generate more revenue from the business's existing assets This ratio can also be improved by increasing financial leverage, i.e borrowing to increase investment capital
A study by Bowman and Haire (1975) gave an assessment of the business performance of an enterprise assessed through the return on equity (ROE)
There are many criteria to evaluate the production and business efficiency of enterprises; from the previous authors' studies, the author selects the indicator group
of indicators within the scope of this thesis research Return on sales (ROS), return on total assets (ROA), and return on equity (ROE) are metrics used to assess an enterprise's performance
Trang 8CHAPTER III Theoretical basis of factors affecting business performance
of enterprises 3.1 Company Size
A large-scale enterprise is one that has a large-scale, high-tech manufacturing force Capable of competing in high-level and novel technical competitions around the world There are scientific research organizations as well as a highly skilled technical staff Diversifying business operations, producing a variety of products, conducting business in a variety of industries, and bringing about change in the market and abroad
Small-scale enterprise is defined as an enterprise with a small production force, outdated production tools, a limited operation scope, producing only one typical product, and no extensive research organizations in the market
The size of a company is important in determining the performance of a business, and it has a variety of effects on the financial performance of that business Firm size is regarded as an important predictor of a company's profitability
Several studies have found that firm size has an effect on business performance Malik (2011) discovered that the size of the firm has a positive relationship with the firm's profitability
3.2 Leverage
Businesses use leverage to launch new projects, finance inventory purchases, and grow their operations
Borrowing money may be more advantageous for many organizations than using equity or selling assets to finance activities When a firm employs leverage, such as issuing bonds or taking out loans, there is no need to give up ownership holdings in the company, as there is when a company takes on new investors or issues more stock
+ Financial leverage denotes a company's debt in relation to the amount of money invested in it by its shareholders, also known as equity This is an essential metric since it reveals if a company can repay all of its debts with the capital it has raised A corporation with a high debt-to-equity ratio is regarded as a riskier investment than one with a low debt-to-equity ratio
+ Operating leverage does not account for borrowed funds Rather, it is a company's fixed cost to variable cost ratio Manufacturing enterprises, for example, have strong operating leverage due to their large continuous expenses High operating leverages indicate that if a company runs into trouble, it will find it more difficult to turn a profit due to the company's relatively high fixed costs
Trang 9Although financial leverage as a force acting on the business increases its financial capacity, it is a two-edged sword If you do not know how to use it at the right time, businesses will face numerous financial risks Gupta et al (2010) cite a number of studies that produce contradictory findings regarding the relationship between increased use of debt in capital structure and financial performance Ghosh, Nag, and Sirmans (2000), as well as Berger and Bonaccorsi di Patti (2006), show a positive relationship between leverage and financial performance, whereas Gleason et al (2000), Simerly and Li (2000) show a negative relationship Similarly, Zeitun and Tian (2007) discovered that leverage reduces financial performance
3.3 Liquidity
This is an important factor to decide on production capacity as well as an indispensable indicator to evaluate the size and business situation of an enterprise The ability to pay includes the following criteria:
+ Short-term solvency shows how many VND of short-term debt is secured by VND of short-term assets
Current ratio =
Enterprise managers need to maintain this indicator is always greater than or equal to 1, meaning that the total term assets must be greater than the total short-term liabilities The short-short-term solvency of an enterprise is greater than 1, indicating that the enterprise has a good production and business situation
+ Quick solvency: shows how many VND of short-term assets is guaranteed when not taking into account inventory
Quick ratio =
An efficient manufacturing business is one with low inventory If this coefficient is less than 1, it means that the production and business of the enterprise does not bring high efficiency
+ Instant solvency: this indicator shows how much of a company's debt is secured by cash and cash equivalents
Trang 10Cash Ratio =
This indicator is also maintained by the manager at a level greater than or equal
to 1 Instant solvency will show that the company has the ability to cover short-term debt in cash However, managers also need to consider the appropriate level of cash and cash equivalents in the fund, avoiding the situation of excessive cash reserves without profitability
Current assets are highly liquid assets (with the fastest ability to convert to cash) such as cash, bank deposits, accounts receivable, inventory, etc
According to Liargovas and Skandalis (2008), firms can use current assets to finance financial investments when external resources are unavailable Higher liquidity, on the other hand, can enable a business to weather the unexpected and difficulties in times of crisis
According to Almajali et al (2012), a firm's short-term solvency has a positive effect on its financial performance Because of the positive relationship between short-term solvency and financial performance of the business, the results show that firms should increase short-term assets while decreasing short-term liabilities
3.4 Cash Conversion Cycle ( CCC)
The cash conversion cycle (CCC) is a metric that expresses the time (measured
in days) that it takes for a company to convert its investments in inventory and other resources into cash flows from sales This metric takes into account how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills
+ CCC= DIO + DSO – DPO
+ DIO = (Average Inventory / COGS) × Number of Days in Period
+ DSO = =
+ DPO = =
The CCC is one of several quantitative measures that help evaluate the efficiency of a company’s operations and management A trend of decreasing or steady CCC values over multiple periods is a good sign, while rising ones should lead
to more investigation and analysis based on other factors One should bear in mind that CCC applies only to select sectors dependent on inventory management and related operations