A CRITICAL ANALYSIS OF THE USE OF ACCOUNTING RATIOS TO MEASURE FINANCIAL PERFORMANCE OF AN ORGANIZATION (A CASE STUDY OF UNILEVER FINANCIAL STATEMENT FROM 2009 TO 2011)
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A CRITICAL
ANALYSIS OF THE USE OF ACCOUNTING RATIOS TO MEASURE FINANCIAL PERFORMANCE OF AN
ORGANIZATION (A CASE STUDY OF UNILEVER FINANCIAL STATEMENT FROM 2009 TO 2011)
CHAPTER ONE
Over the years,
one major aim of most organizations in Ghana is to improve on their financial
performances through effective and efficient accounting and finance practices.
Financial performance of every organization in recent times have gained top
priority, as most users of accounting and financial statement have developed
indents in the financial position of the organization in question. Stakeholders
of every organization need to know the financial performance of their
organization, hence the need for managers to improve the financial position of
the organization they manage. Assessing the financial position of an
organization is the first step for organizations who want to improve their
financial performances. After assessment, control measures are now established to
correct deviations, and improve financial performance. The overview of the
manufacturing industry in Ghana is explored including the various types of
manufacturing organizations of which Unilever Company Limited is part. However,
this research was undertaken to help assess the financial performance of
manufacturing organizations for the periods, 2008, 2009 and 2010 using Unilever
Company Limited as a case study.Â
1.1
BACKGROUND OF THE STUDY AND ORGANIZATIONAL PROFILE
1.1.1
HISTORY OF THE GHANAIAN MANUFACTURING INDUSTRY
In 1957,
after Ghana gained independence, the Nkrumah government launched an
industrialization drive that increased manufacturing’s share of GDP from 10
percent in 1960 to 14 percent in 1970. This expansion resulted in the creation
of a relatively wide range of industrial enterprises, the largest including the
Volta Aluminum Company (Valco) smelter, saw mills and timber processing plants,
cocoa processing plants, breweries, cement manufacturing, oil refining, textile
manufacturing operations, and vehicle assembly plants. Many of these
enterprises, however, survived only through protection. The overvalued cedi,
shortages of hard-currency for raw materials and spare parts, and poor
management in the state sector led to stagnation from 1970 to 1977 and then to
a decline from 1977 to 1982.
Thereafter,
the manufacturing sector never fully recovered, and performance remained weak
into the 1990s. Underutilization of industrial capacity, which had been endemic
since the 1960s, increased alarmingly in the 1970s, with average capacity
utilization in large- and medium-scale factories falling to 21 percent in 1982.
(CIA World Factbook, 2008)
Ghana’s
record with industrialization projects since independence is exemplified by its
experience with aluminum, the country’s most conspicuous effort to promote
capital-intensive industry. This venture began in the mid-1960s with the
construction of a 1,186-megawatt hydroelectric dam on the lower Volta River at
Akosombo. Built with assistance from Britain, the United States, and the World
Bank, the Akosombo Dam was the centerpiece of the Volta River Project (VRP),
which the Nkrumah government envisioned as the key to developing an integrated
aluminum industry based on the exploitation of Ghana’s sizable bauxite reserves
and its hydroelectric potential. Foreign capital for the construction of an
aluminum smelter in Tema was obtained from US-based Kaiser Aluminum, which
acquired a 90 percent share in Valco, and from US-based Reynolds Aluminum,
which held a 10 percent share. Valco became the principal consumer of VRP
hydroelectricity, using 60 percent of VRP-generated power and producing up to
200,000 tons of aluminum annually during the 1970s. (CIA World Factbook, 2008)Severe drought
compounded the effects of unfavorable market conditions by reducing the
electricity generating capacity of the Akosombo Dam and by forcing a temporary
shutdown of the smelter from 1983 to 1985. Aluminum production was slow to
recover in the wake of the shutdown. In the early 1990s, aluminum production
and exports continued to be negligible.
Drastic
currency devaluation after 1983 made it exceptionally expensive to purchase
inputs and difficult to obtain bank credit, which hurt businessmen in the
manufacturing sector. Furthermore, the ERP’s tight monetary policies created
liquidity crises for manufacturers, while liberalization of trade meant that
some enterprises could not compete with cheaper imports. These policies hurt
industries beset by long recession, hyperinflation, outmoded equipment, weak
demand, and requirements that they pay 100 percent advances for their own
inputs. Local press reports have estimated the closure of at least 120
factories since 1988, mainly because of competitive imports. The garment,
leather, electrical, electronics, and pharmaceuticals sectors have been
particularly hard hit. In 1990, even the New Match Company, the only safety
match company in the country, closed. (CIA World Factbook, 2008)
In 1986 the
government established the Ghana Investment Center to assist in creating new
enterprises. Between 1986 and 1990, the vast majority of projects
approved—444 of 621—were in the manufacturing sector. Projected investment
for the approved ventures was estimated at US$138 million in 1989 and at US$136
million in 1990. In the initial phase, timber was the leading sector, giving
way in 1990 to chemicals. In 1991 the government established an office to deal
with industrial distress in response to complaints that “unrestrained
imports†of foreign products were undermining local enterprises. The 1992
budget included assistance for local industrialists; ¢2 billion was set aside
as financial support for “deserving enterprises.â€
The dominant
trends in manufacturing, nonetheless, were the involvement of foreign capital
and the initiation of joint ventures. Significant new enterprises included a
US$8 million Taiwanese-owned factory, capable of turning out ten tons of iron
and steel products per hour, which began trials at Tema in 1989. Although
approximately 500 projects had been approved since the investment code came
into force in 1985, almost half had still not been launched by the end of 1989.
Between 90 and 95 percent of the approved projects were joint ventures between
foreign and local partners, 80 percent of which were in the wood industry. (CIA
World Factbook,
1.1.2
Company Profile
Unilever
Ghana Limited was established in Ghana between 1928-1931 as the United African
Company (UAC) out of two companies, the lever Brothers’ company and the
African and Eastern Trade Corporation. The Lever factory was built in 1963. The
UAC was absorbed into its parent Company Unilever from the United Kingdom to
form Unilever Ghana Limited in 1992. It had already been operating as a trading
company but later shifted to manufacturing. Currently, the company’s business
in Ghana comprises the manufacturing and distribution of food products like
cooking oil, spices and iodised salts, home care products like soaps and
detergents and personal care products like body, hair and oral care products.
The company has eleven departments which includes; The customer Development
department, Human Resource department, Brand Building department , Legal
department, Supply Chain department, Production department, Finance department,
sales routine department ,Transport department, Quality department and
Information Technology department. The company has its headquarters at Tema and
has 900 employees across the country. Unilever Ghana Limited is a public
company domiciled in Ghana. The company’s country of incorporation is Ghana.
The address of the company’s registered office is Tema Factory, P. O. Box 721,
Tema, Ghana. The consolidated financial
statements of the company as at the year ended 31 December 2008 comprise the
company and its subsidiaries (together referred to as the “Group”). The Group
primarily is involved in the manufacture of consumer products, the growing of
oil palm and the processing of palm fruits to produce palm oil and palm kernel.
The company is listed on the Ghana Stock Exchange. The ultimate parent company
is Unilever PLC, a company incorporated in England. Other related parties,
Unilever
Overseas Holdings Limited, UAC International Limited and CWA Holdings Limited,
Companies wholly owned by Unilever PLC has significant shareholdings in
Unilever Ghana Limited. In view of the fact that Unilever Ghana Limited has the
power to exercise control over the operating and financial policies of Twifo
Oil Palm Plantations (TOPP) Limited, and in accordance with International
Financial Reporting Standards, TOPP has been designated as a subsidiary. In
October 2003, Unilever Ghana Limited acquired 58.45% shares in Benso Oil Palm
Plantation Limited from Unilever Overseas Holdings/CWA Holding, a company based
in the United Kingdom.
1.2
STATEMENT OF THE PROBLEM
The
manufacturing industry today is an integral part of the Ghanaian economy. The
manufacturing industry has gone through some transitions to its current state.
The industry over a number of decades now has experienced great decline and as
a result most of the organizations have closed down due to poor performances.
In this light, successive governments have made great stride to improve this
industry by way of reviving some of the dead organizations.
Moreover,
the continued growth of an institution may depend on its ability to generate
adequate resources from its day to day operations. Financial performance
measurement or assessment is therefore imperative in assessing the growth and
progress of a business. Assessing the financial position of a company in a
likewise manner requires examination of its past and current performance in
order to predict its future prospects. By using financial performance measures,
a company’s performance can be linked more closely to shareholders value and
wealth. Attention can, thus, be directed to ways in which companies can create
more value for shareholders. Therefore, this study seeks to adopt ratio
analysis as a key financial performance appraisal method to examine, evaluate
and interpret the growth trend of Unilever Company Limited.
The purpose
of the study is to assess the financial performance of manufacturing
organizations for the period, 2008, 2009 and 2010 using Unilever Company
Limited as a case study. The objectives of the study include:
To measure
the liquidity position of Unilever Company Limited.
To find out
the profitability trend of the organization given its level of investment and
turnover.
To find out
the level of gearing and investment ratios of the organization.
To assess
the performance measurement policy within Unilever Company Limited.
1. What is
the liquidity position of Unilever Company Limited?2. Given their level of
investment turnover, what is the profitability trend of the organization?3.
What is the ratio between the levels of gearing and investment of the
organization?
4. What
performance measurement policy is adapted within the organization?
1.5
SIGNIFICANCE OF THE STUDY This study gives insight into the various ways or
techniques that will help improve organizations performance and how the
financial performance of organizations in Ghana can be properly assessed. The
study will also go a long way in showing the various accounting techniques that
managers can adopt in measuring financial performances, and its implications on
the financial position of organizations.
The findings
and recommendations of the researcher will help in building a strong and better
accounting practices that will help in the assessment of organizations
performance in Ghana, if taken seriously by government and the general public.
It may serve as a reference to other researchers who may want to research into
the field.
1.6 SCOPE OF
THE STUDY
The overall
scope of the study is to assess the financial performances of Unilever Company
Limited for the periods 2008, 2009 and 2010. Unilever Company Limited was
chosen because it is near to the researcher and gathering of information also
becomes very easy. The above periods were also chosen because; the researcher
wants to assess the more recent financial performance of the company under
study. With the assessment of the financial performance, the researcher will
adopt the concept of ratio analysis tools and techniques. The scope in terms of location can be found
in the Eastern Religion, Koforidua. This region was selected because of
proximity to the researcher.
1.7
LIMITATIONS OF THE STUDY
Notwithstanding
the concern for efficient, effective and dependable findings, there were few
limitations encountered in the course of carrying out the study. Among these
include:
1). Limited
funds available to undertake the study.
2). Attitude
of Respondents: there was a poor response from respondents to interviews which
brings difficulty in compiling and analyzing available data.
3).
Availability of Data: There was also the problem of getting data from the
selected organizations. That is, there was delay in getting the data needed
from the organizations or not getting it at all.
1.8
ORGANIZATION OF THE STUDY
This
research paper is organized into chapters, with the chapters being organized as
below:
Chapter one:
This chapter includes the general introduction, background information about
the study, statement of the problem, objectives of the study, research
questions, scope of the study, significance of the study, and the limitation of
the study.
Chapter Two:
This chapter reviews the related literature on the topic-Assessing the
financial performance of Unilever Company Limited for the periods 2008, 2009
and 2010. This chapter considers both the empirical and theoretical literature
available on the subject matter.
Chapter
Three: This chapter deals with methodology of the research. That is the various
methods that the researcher adopted in carrying out the research. This chapter
includes the study site, research design, data collection methods, data
analysis and limitations.
Chapter
Four: This chapter is concerned with the discussion of Data, analysis of data and
the interpretation of the data collected. That is, how the data was processed,
presented, arranged etc. to bring out the meaning in them so to help achieve
the objectives of the study. The chapter is made of absolute figures, charts,
tables etc in analyzing the data collected.
Chapter
Five: Summary of findings, Conclusion and Recommendations. This chapter deals
with presentation of findings, making conclusions from the findings of the
study and its implication. It considers recommendations and suggestions based
on the findings of the study.
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