MA – May 2020 – L2 – Q1 – Performance Analysis

Analyze and discuss VAR's performance under financial performance, internal efficiency, and external effectiveness for the year ended 31 December 2016.

Question

Volta Advisory Ltd (VAR) began trading on 1 January 2014. It specializes in the provision of expert advice to clients in accountancy, taxation, and regulatory compliance. It has a team of professional advisors, each specializing in one of these three areas of advice.

VAR has a target for delivering its services to clients promptly. From the time the client asks for advice, VAR undertakes to provide a formal report to the client within 10 working days. The following information relates to the financial year ended 31 December 2016.

i) The professional advisors are budgeted to work 220 days each year. They charge GH¢1,400 per day to new clients and GH¢1,200 to established clients.

ii) As a marketing measure intended to win new business, the advisors also give consultations to potential clients on a ‘no fee’ basis. These consultations, which are budgeted to take one day each, are accounted for as business development costs in the marketing budget.

iii) The professional advisors are also required to attend some ‘workshops’ with new clients who are having difficulties with implementing the advice that they have been given by VAR. These workshops, which are also given on a ‘no fee’ basis, are budgeted to last two days.

iv) VAR also has a help desk to provide client support. It responds to telephone and e-mail inquiries from all new and established clients.

v) The team of professional advisors is exactly 50. It is a policy of VAR to limit the team to 50, regardless of the volume of demand for its services.

vi) All professional advisors are paid a salary of GH¢100,000 per year. In addition, they are entitled to share equally in an annual bonus. The bonus is 50% of the amount by which fee income generated exceeds budget minus the revenue foregone as a result of having to give workshops for clients. This revenue foregone is assessed at a notional daily rate of GH¢1,200 per advisor/day.

vii) Operating expenses of the business, excluding salaries of the advisors, were GH¢3,100,000 in 2016. The budget for these expenses was GH¢2,800,000.

Other information

	Budget 2016	Actual 2016
Professional advisors, by category:
Accounting	15	10
Tax	20	20
Compliance	15	20
Enquiries about seeking new advice:
New clients	2,600	2,200
Established clients	4,000	3,700
Number of chargeable client days:
New clients	2,600	2,750
Established clients	5,100	5,500
Average client days per job	4	4
Mix of chargeable client days:
Accounting	1,155	1,650
Tax	1,540	3,300
Compliance	1,155	3,300

The following are actual results for each of the three years 2014-2016:

	2014	2015	2016
Number of clients	160	248	347
Number of complaints from clients	50	75	95
Number of accounts in dispute	10	7	5
Support desk: percentage of calls resolved	86%	94%	97%
Percentage of jobs completed within 10 days	90%	95%	98%
Average time to complete a job (days)	12.6	10.7	9.5
Chargeable client days	7,200	7,750	8,250
Number of consultations (business development)	50	100	150
Number of workshops given	110	135	165
Revenue (GH¢000)	8,920	9,740	?
Net profit (GH¢000)	1,740	1,940	?

Required: Using the information provided, analyze and discuss the performance of VAR for the year to 31 December 2016, under the following headings:

a) Financial performance and competitiveness;
b) Internal efficiency;
c) External effectiveness.

Answer

a) Financial performance and competitiveness
VAR achieved a net profit that was over 12% in excess of the budget in 2016. Total sales grew by 7% in 2016 compared with 2015, in spite of the fact that the budget provided for very little revenue growth. The net profit margin was 21.1%, compared with 19.9% in 2015 and 19.5% in 2014. VAR appears to have established a very profitable and successful business in the three years since it was established.

The competitiveness of VAR can be judged to some extent by the increase in the number of clients, which has gone up from 160 in 2014 to 350 in 2015. The average revenue per client, however, has gone down. On average, clients were paying for 23.6 days of advice in 2016.

However, there is no information about the share of the market that VAR now has for professional advice.
(Any 2 valid points explained =4 marks)

b) Internal efficiency
Internal efficiency can be measured by productivity. The budgeted number of chargeable client days was 7,700 days. The total number of adviser days in the year should have been 11,000 (50 × 220 days). This means that the budget was for 70% of days to be chargeable days, and 30% non-chargeable. Actual chargeable days were 8,250, which was 75% of total days, leaving 25% of days as non-chargeable days. This indicates that actual productivity in earning revenue was better than the budget target.

Internal efficiency and external efficiency can both be measured by flexibility. VAR has a policy of restricting the team of advisers to 50. However, within this limit of 50 advisers, VAR has been flexible enough to respond to a pattern of customer demand in which the demand for accounting advice was less than budget but the demand for advice on compliance is much higher. This suggests that VAR has the flexibility to switch advisers from one specialty to another.

At an operational level, internal efficiency can be measured by process time. The information provided shows that the average time to complete each ‘job’ has continued to fall, indicating greater efficiency, and a growing number of ‘jobs’ are being completed within the target time of 10 days.

Internal efficiency can also be measured at an operational level by waste. Here, the performance is not as good as it might have been. Waste could be measured by the number of ‘no fee’ workshops given to clients. These have gone up by 50% since 2014, to 15 workshops in 2016. At two days per workshop, this represents 330 days that have been lost that might otherwise have been used to earn income. The potential loss of revenue at GH¢1,400 a day was therefore GH¢462,000.

Management should look into the reasons for the growth in the number of workshops, to establish what measures might be taken to reverse the trend.
(Any 4 valid points explained @1.5 marks =6 marks)

c) External effectiveness
External satisfaction can be measured by customer satisfaction and flexibility (as indicated earlier). There are some indications that customer satisfaction is quite high. The growth in client numbers is one indicator.

A better indicator might be the rate of converting enquiries into ‘sales’. The budget for 2016 provided for 7,700 chargeable days and an average of 4 days per ‘job’. This means that the budget provided for 1,925 ‘jobs’. It also provided for 6,600 enquiries from customers, which means that about 30% of enquiries would be converted into fee-earning work.

Actual results in 2016 were 8,250 chargeable days, giving about 2,062.5 ‘jobs’. There were 5,900 enquiries, making a conversion rate of about 35% of enquiries into fee-earning work. This indicates that actual performance was better than budget in this all-important area of making sales.

Increasing customer satisfaction might also be evident in the decline in the number of customer complaints, which was down to 5 in 2016. However, it is not clear that the increasing number of consultations (business development) is having a significant effect in increasing sales. This should be investigated.