Inter-Firm Comparisons: Meaning and Prerequisites | Accounting

In this article we will discuss about:- 1. Meaning of Inter-Firm Comparisons 2. Prerequisites for Inter-Firm Comparisons 3. Problems.

Meaning of Inter-Firm Comparisons:

Inter-firm comparisons is a technique of evaluation of performance, efficiency, costs, profits etc. of firms producing same type of products. It consists of voluntary exchange of information/data concerning costs, prices, profits, productivity, efficiency among the concerns engaged in same industry.

The main objective of Inter-firm comparisons is to improve the efficiency of the industry by highlighting the weakness and strengths. It brings out the efficiency of management in carrying out the operations of the company.

The main purpose of Inter-firm comparisons is the improvement of efficiency by showing management the present achievements and possible weaknesses. Firms contribute figures to the centre which is a ‘neutral’ body.

Great care is taken to ensure that confidential matters are never betrayed and only participants are given a report on any comparison which is made. Many problems may be overcome through the assistance of Inter-firm comparisons. More usually attention is focused on any weaknesses which may exist.

Prerequisites for Inter-Firm Comparisons:

(1) Uniform Costing:

Adoption of uniform costing is an important prerequisite for implemen­tation of Inter-firm comparisons. It inculcates cost conscious among members of the industry.

(2) Membership of Trade Associations:

The firms of different sizes in the same industry should form into a trade association for successful adoption of Inter-firm comparison. Trade association generally collect the required information from its members and disseminate the results to its members.

The function of such association would be:

(a) Collection of data and information from its members.

(b) Dissemination of results to its members.

(c) Undertaking research and development for the benefit of its members.

(d) Organizing training programs.

(e) Publish journals and other data for the benefit of its members.

(3) Information to be Collected:

The nature of information generally collected, processed and published relating to the following:

(a) Raw material consumption

(b) Production units, wastage and scrap

(c) Labour wage payments

(d) Labour efficiency and utilization

(e) Machine capacity and capacity utilization

(f) Capital employed

(g) Sales revenue and sales quantity

(h) Working capital and liquidity position

(i) Appropriations and dividends

(j) Cost structure

(k) Methods of production and process

(l) Major sources of information is published annual accounts. Trade associations may also collect the supplementary information by sending questionnaire to each of its members.

(m) Information so collected will be available only to the members of the association,

(n) The limitations of uniform costing is applicable to the Inter-firm comparisons.

(4) Procedure in Making Inter-firm Comparisons:

Inter-firm comparisons may take a variety of different forms.

An Inter-firm comparison consists of the following procedure:

(a) Data are collected from participating organizations by the centre for Inter-firm comparison.

(b) The management of an organization are provided with information which will allow them to determine the efficiency being achieved, measured by comparing the perfor­mances of other businesses.

(c) An attempt is made to show why results vary from one business to another i.e., any weaknesses are highlighted. Extensive use is made of financial or cost ratios. These are selected with great care bearing in mind the problems which are being faced.

Problems in Inter-Firm Comparisons:

Some of these special problems may be the following:

(a) Is profit adequate?

(b) How efficient is selling?

(c) How efficient is production?

These and similar questions are always present in any business, so obviously any system, method or advice which assists in providing solutions is to be welcomed. More details of these problems are now considered.

a. Adequacy of Profit:

The principal motivating force in any commercial enterprise is profit. Success is measured by the size of the profit in relation to the capital employed. If the earning power of a business does not at least equal that of other similar concerns then there is probably some factor or a combination of factors which is not operating efficiently. These may then be isolated by means of ratios.

b. Efficiency in Selling:

Unless goods are sold there can be no profit. The size of the total sales to operating profit and to assets employed are key ratios in illustrating important facts in the profit- earning structure. The operating profit to sales ratio indicates the total margin earned by the sales. Expressed as a percentage it will show the percentage earned on sales.

The sales to assets employed ratio shows how many times capital employed is covered by sales. Put another way it indicates how much is sold per Re. 1 invested.

The ‘size of the sales’ (sales to operating assets ratio) can be analyzed still further by the following ratios:

(a) Sales to fixed assets.

(b) Sales to Current Assets, analyzed into:

(i) Stock turnover

(ii) Turnover of debtors.

(c) Production Efficiency:

The production departments have to produce an adequate volume of output at costs which are reasonable i.e., which enable a sufficiently large gross margin to be earned.

The factory cost broken down into:

(i) Direct material,

(ii) Direct labour, and

(iii) Production overheads, and related to the sales value of production, should indicate the relative size of these three main elements of cost.

Comparisons with other firms’ figures or with its own preceding periods’ figures may point out a possible source of inefficiency e.g., labour utilization or machine utilization. A detailed analysis and investigation can then follow.