RATIOS ARE MATHEMATICAL CALCULATIONS THAT the company can use to evaluate its performance. They help the company to determine whether trends are improving or deteriorating. They are calculated by comparing two numbers with each other. The most valuable use that can be made of ratios is to compare the ratios for this year with the same ratios for the previous year and with the ratios of other companies in a similar business. Ratios also serve as goals for future performance.

Many of us use statistical indicators, many of which are actually ratios, to monitor the business. These key indicators include:

• Output per labor hour
• Capacity utilization
• Market share
• Sales orders
• Average length of a production run
• Passenger revenue miles (airlines)
• Responses/mailings (direct mail)

Some of these productivity measures are immediate in nature. They can be monitored on an hourly or daily basis, and manage- ment can make immediate adjustments in response to them. These are very much ‘‘real-time’’ indicators.

These statistical indicators are very much the domain of internal management. While internal statistical information would certainly be interesting and might be valuable to outsiders, they have little or no access to it. Interestingly, in the automobile business, information concerning units produced, units sold, and available inventory are public information. But this is an exception.

First-level line managers in both sales and operations require detailed statistical information on a regular basis—and frequently. Operations supervisors fine-tune machinery, redeploy labor resources, and manage the logistics of inventory. Sales managers direct daily or weekly sales calls, schedule appearances at trade shows, and determine immediate customer satisfaction. Senior managers don’t require this degree of detail to carry out their responsibilities, and certainly not on an hourly, daily, or even weekly basis. The higher the manager’s level of responsibility, the more an overview is the necessary perspective. That explains why, as managers progress through the organization’s ranks, their concerns and perspectives become more financial and strategic.

1. Financial Ratios
2. Liquidity Ratios
3. Working Capital Management Ratios
4. Inventory Turnover Ratio
5. Financial Leverage Ratios
6. Debt/Equity Ratio

[ HOME ]

Next:Financial Ratios