Baseball and Printing: Financial Ratio Analysis
In business, it is more difficult to “see” productivity, especially productivity as compared to the competition. After all, we don’t line up and engage a competitor in an open field for the whole world to see. It makes monitoring ratios all the more critical.
There are many ratios you can use to monitor productivity verses the competition. They all measure how good a job your company is doing using its assets, generating profits from each dollar of sales, turning over inventory, or whatever aspect of your company’s operation you are evaluating.
For your business, ratios are nothing more than simple comparisons between specific pieces of information pulled from your company’s balance sheet and income statement. You can use ratio analysis to examine the current performance of your company in comparison to past periods of time, from the prior quarter to years ago. Frequently, this can help you identify problems that need to be fixed. Even better, it can direct your attention to potential problems that can be avoided.
In addition, you can use ratios to compare the performance of your company against that of your competitors or other members of your industry.
Remember the ratios you will be calculating are intended simply to show broad trends and thus to help you with your decision-making. They need only to be accurate enough to be useful to you. Don’t get bogged down calculating ratios to more than one or two decimal places.
General trends and striking disparities are important to watch. There could be good reason for the disparities, but understanding them, understanding why they exist, and how they impact your pricing and bottom line profit can make all the difference in the world to estimating, sales pricing, sales pitch delivery, future purchasing, and more.
Just like baseball General Managers use ratios to decide who to sign for a season, banks and investors use financial ratios as a method to decide who is worthy to sign too. Knowing your “stats” ahead of time will help your position if evaluated. Can you imagine a baseball General Manager drafting a player who is unsure of his batting average?