Ratios-10

If you use a baseline period expressed in terms of 1.00, the percentage increase or decrease in sales, gross margin, net income, or any other income statement line item will be evident from the comparative analysis.
Other ratios that may be useful could be based on other types of data.  For example, in a labor-intensive environment where the output of each individual employee is a key factor in sales and profitability, useful ratios could include:

• Sales by Employee = Total Sales / Number of Employees
• Added Value by Employee = Total Added Value (Gross or Net Profit) / Number of Employees

In a capital-intensive environment, ratios related to the investment in equipment, or maintenance costs may be more relevant:

Expense Analysis Ratios

One type of ratios that can be used to track expenses is by comparing different categories of expenses to sales:

• Fixed Expenses or Overhead / Sales
• Variable Expenses / Sales
• Personnel-related Expenses / Sales

This type of ratios will be useful to the extent there are parameters established, comparison is made using benchmark data, or the evolution of expenses is compared from one period to another.
Another way to analyze expenses is by comparison to an associated criteria, such as number of employees, customers, or products.  These ratios give a type of unit cost which, when compared to a parameter, or when followed over time, can provide indications of where variances are occurring:

• Customer Service Expenses / Number of Customers
• Advertising Expenses / Number of Products
• Production Expenses / Number of Units Produced
• Personnel-related Expenses / Average Number of Employees

Productivity Ratios

Productivity rations are intended to show the results obtained with the expenses incurred or the resources employed.  Some overall ratios include:

• Net Income / Expenses
• Sales / Expenses
• Production / Expenses
• Trade Accounts Receivable / Expenses

More specific ratios can be calculated using virtually any type of criteria.  Ratios that are meaningful will depend on the nature of the business; that is, what factors affect productivity and can be tracked and controlled.
Another productivity ratio, that is probably more oriented toward a manufacturing or production environment, is:

• Utilization of Productive Capacity = Production Obtained / Production Capacity
  
  
  

  Ratios of Effectiveness

  Effectiveness has to do with comparing actual results with budgeted, forecast, or expected results.  These ratios can be calculated on any item for which actual and expected results are available, and which are of interest in managing the business.  Some examples include:
  
  • Forecast Profit / Actual Profit
  • Forecast Sales / Actual Sales
  • Forecast Production / Actual Production
  • Forecast Trade Receivables / Actual Trade Receivables
  It should be noted that calculating the ratios as indicated above will yield a ratio greater than 1.0 if actual results are lower than forecast results.  If you want to see a ratio of less than 1.0 if actual results are lower (for example, you want to see what percentage of forecast or budgeted profit you actually achieved) you would have to invert the ratios.
  To see how efficiently you controlled expenses, you could calculate efficiency ratios of any individual expense item, or any grouping or total expenses:
  
  • Efficiency = Forecast Expenses / Actual Expenses
  In addition to effectiveness and efficiency, quality control is another concern that can be expressed through ratio analysis:
  
  • Number of Customer Complaints / Number of Customers
  • Number of Late Deliveries / Total Orders Delivered
  • Quality Evaluation and Assurance Costs / Sales
  • Costs of Damages and Defects (Sales Returns) / Sales
  • Cost of Service After the Sale / Sales