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Ratio analysis can be an effective and useful management tool if ratios are calculated on items that are meaningful and where practical steps can be taken to make improvements in business operations based on the information the ratios reveal. Dynamic analysis and comparisons over time, that show trends and evolutions, can be particularly useful in tracking, monitoring and controlling those items that are key to the success of the business. Benchmarking, comparisons with competitors, and ratio analysis that shows your position in your specific market segment can make you aware of developments and areas of opportunity that can make your business more competitive, and ultimately more profitable.

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 use...

If you have the capability to generate income statements by product, or by product lines, you will have good insight as to where resources and efforts can be allocated more efficiently and profitably.  If this information is not readily available from your accounting system, you may be able to prepare pro forma income statements by product.  Certain costs may be more readily assignable to specific products than others.  Costs that may be allocable by product include: Materials and supplies Direct labor Manufacturing cost Sales commissions Advertising and publicity By breaking down sales by product, and then allocating these direct costs, you can determine a gross margin by product.  This will be helpful in showing which products are contributing the most to your bottom line.

If you have access to data on your particular market, you can determine your share of the market as: Market Share = Your Company’s Sales / Total Sales in Your Market Sector This ratio could be calculated in terms of volume of units sold, dollar value of sales, or both. If your business involves more than one type of product, you can determine the relative importance of each product, in terms of your total sales, as: Participation of Product A in Total Sales  = Sales of Product A / Total Sales To obtain an indication of how well you are renewing your product line, you can use the following ratio: Level of Renewal of Product Line = Sales of New Products / Total Sales The more information you have regarding the sales and costs of each of your own products, and the associated figures relating to your market sector, the more types of analyses you can perform. By breaking down your actual sales by individual product, or line of products, and comparing these figures with the c...

You can also analyze income statement accounts by using a baseline period.  The baseline period could be your budget, a break-even point, your first year of operations, any period of actual results against which you want to compare other periods; or the baseline could be industry benchmark data or the results of a similar business, such as a competitor. The results of any period you are comparing to the baseline period would be expressed in terms of a percentage of the corresponding amount from the baseline period.  By doing this type of analysis over more than one period, you can see the absolute variances in the amounts of each element of the income statement as compared to the baseline, as well as relative variances from one period to another.  For example, if your baseline indicates gross profit as 40% of sales, you will be able to track, period by period, how your actual gross profit compares (whether it is higher or lower than 40%) and how it is evolving (Is it g...

The income statement can also be broken down into its component parts and analyzed on a percentage basis. Percentage Breakdown Some of the principle items in an income statement, that could be expressed as a percentage of sales, for example, include: Sales (100% in this example) Cost of Sales Gross Margin Fixed Costs or Overhead Net Income Before Interest and Taxes Interest Expense and Financing Costs Net Income Before Income Tax Income Tax Net After-Tax Income By doing a comparative analysis based on percentages over different periods, you can see how the different components of the income statement are evolving.  Here again, graphs would be a useful visual tool.

The total amount of debt your business is carrying is important, but it is also important to know what type of debt you are carrying.  In this regard, it can be useful to prepare an analysis, or table of debt characteristics. Some of the data you may want to include in this type of analysis include: Type of debt (secured and unsecured bank loans, revolving lines of credit, bonds) Amount of each type of debt Interest rate (fixed, variable, and percentages) Due dates Annual debt servicing cost Annual installments Collateral provided Having a clear picture of the structure of your debt will allow you to make decisions regarding potential alternative sources of financing, if necessary.

Based on your experience with your business and its operations, you may be able to set some parameters or guidelines to use in analyzing the percentages and determining where actions need to be taken to make changes or modifications.  The following are some examples: Current assets (cash and cash equivalents, realizable assets, and inventory) should be greater than, and if possible double the amount of short-term liabilities. Realizable assets plus cash and cash equivalents should be approximately equal to short-term liabilities. Owner’s equity should amount to 40% or 50% of total liabilities and owner’s equity. You may also use benchmarking to compare the status of your business, in terms of relative proportions of different groups of assets and liabilities, with industry standards, or other comparable operations.

A static analysis of these percentages at any given point in time can be useful.  But a dynamic analysis, comparing the evolution of these percentages from period to period can be even more useful in seeing overall trends, and thereby knowing how resources are being allocated, what type of debt is being incurred, and how owner’s equity is being affected by operations. This type of dynamic analysis can be performed by choosing a certain period or year as a baseline (N), and then comparing the percentages for period N with the percentages for the following period (N+1), or with the percentages from as many other periods (N+2, N+3, N-1, N-2, etc.) as you wish, in order to see the trends over the periods in which you are interested.

I understand the fact what an unemployed is facing in this new century.Added to that is the latest economic review by the experts..Do have a look at it.. http://www.nytimes.com/2010/08/07/business/economy/07econ.html?hp Fuel to fire...'Inflation'.. http://www.nytimes.com/2010/08/06/business/economy/06deflation.html?hpw

An interesting OLD article in NY times. http://www.nytimes.com/2010/04/25/business/25goldman.html?_r=1&partner=rss&emc=rss

Why Salaried Class in India are Careless or Carefree about the Income Tax paid by them? Salaried class most whom i had an encounter were either IT professionals or Government employed.. Both these class or rather all salaried class had one thing in common that is paying less attention to the incometax paid by them.                        Though all the employees should have ideally given form 16 and TDS details then why is the fuss at the time of filing the return of income in the month of July every year. When form16 does not have many complications like housing loan ,capital gains,etc it is very easy for the assess himself to file the returns instead of delegating or outsourcing the work to someone else who are now a days charging exorbitant rates.                      ...