Do you think that the daily Profit & Loss account should be continued in NYPRO Inc?
In my opinion, the profit and loss account at NYPRO Inc should not be continued due to a number of reasons that are disadvantageous in the long term profitability of the company. Some of these are as discussed below.
First and foremost, the report is insufficient in the kind of information it provides. As pointed out by Ted Lampres, NYPRO’s corporate controller, he suspected that they may be measuring irrelevant factors and he had to use various other means in order to manage the widely dispersed companies. The profit and loss report was costly to the organization and even time consuming Bachelard (2003). Each and every morning, each of the 23 facilities had to report the key data from their three last shifts, it included a whole page of detailed information and another report explaining this information further, the cost of doing this work was definitely high since it needed specialized labor and more so, for a managing director to stay on top of things at NYPRO Inc, It would be very difficult since it is clear that this report was not based on a good cost accounting principles, it was there to act as a scorecard for each of the facilities so that the corporate management could judge the performance of each facility. Ted went on ahead to say that the daily profit and loss account was a ritual by the company’s President Gordon Lankton. A managing director does not need the detailed day to day information in order to make a decision Craig and Walsh, (1989).
Due to the rapid growth in information technology, it is clear that that there some information and value opportunities that could not be achieved while using the profit and loss account as the only report to measure the performance of NYPRO Inc., this disadvantage could easily put NYPRO Inc. behind and compromise their ability to compete with other players in the industry Dunn (2002). NYPRO’s profit and loss account just described the profits and loss of each facility by item and fails to relate this to the actual cost of goods and so it could not be used as the only measure of NYPRO’s performance Parry (1990).
Although the profit and loss account had some very useful information of each of the 23 operational centers, it fails to record the precise measures of the company’s resources that are actually used up per day, this led to the underestimation of the cost and yield of some of the complex projects leading to bad pricing, the other flaw brought about by over reliance on the profit and loss account by NYPRO Inc. is that what is recorded as the standard or optimum output is just an approximation of what should have happened in the prevailing conditions which is not realistic. These two problems lie on the fact that NYPRO’s daily profit and loss report is based on contrasting actual operational costs with the standard of what that cost should have been at the measured output.
The daily measurement of profitability and loss by NYPRO Inc. also may have led to focusing too much on Return on profits (ROI) and important activities like maintaining capital expenditure are put in the background yet they have an impact on the company’s performance. Therefore NYPRO should discontinue its use of the profit and loss account as the only measure of performance.
What are other measures would you recommend?
There are many other additional ways that NYPRO could use to determine the level of performance of all the different 23 facilities as discussed below:
For starters, rather than just relying on the daily profits and loss reports, the management could choose to communicate more frequently with the facilities mangers in order to know exactly what is going on in each facility and find about the market trends and other crucial information that the profit and loss report could not come up with Creedy, (2004).
Secondly, the Economic Value Added (EVA) method could also be used to measure NYPRO’s operational performance for all the facilities Cameron and Natalie (2008). Since EVA puts much focus on value addition and precisely measures the effectiveness of a facility’s operation. It can hence be used alongside the profit and loss report which can be minimized to 2 to 3 times a week. Together with other reports such as weekly reports which highlighted on the operational data such as quality, productivity per employee, on-time shipment and employee safety, the monthly report, which focused on the financial information and contained an analysis of Profit and Loss statement, this would make the entire report more reliable to managers yet not too detailed that it loses its meaning Parker and Porter (2000).
NYPRO’s Inc. management could also consider the use of the ABC type cost system to measure the company’s performance McLean (1999). This is because this method can identify the cost of operations on each of the 23 individual plants of production. Additionally, because ABC relates the cost of products and services, it can be used to calculate the Costs of goods sold (COGS) more easily and effectively hence providing more reliable information for decision making Cameron and Gallery (1998).
NYPRO Inc could also employ the return on assets (ROA) strategy to analyze the long-term profitability trends across all their 23 facilities. Return on Assets avoids all the distortions that can be caused by the profit and loss report and other financial strategies. At the same time, Return on assets is a better metric of the financial of a company’s performance as compared to other income statement profitability measures such as return on sales (ROS), this is due to the fact that ROA focuses on the assets used to directly support the operations of a business. It is able to determine if the company is able to generate an acceptable amount of return on the available assets rather than simply pointing out the strong returns on sales as the profit and loss account does Moerle (2002). Large companies like NYPRO need a higher net income to support the business as a whole as compared to smaller companies where even thin profit margins can result to a healthy return on assets McVay (2006). In addition, using ROA as a key performance metric for NYPRO Inc. will enable each branch manager to quickly focus their attention on the assets required to run the business and make profit instead of having to scrutinize tones of daily, detailed information before making a decision.
References
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