subject: Evaluating Performance Through Management To Business System Ratios [print this page] Every company has its own business system and in order to determine whether the company is improving or not there is a need to make use of business system ratios. Business systems are a necessity and there is a need to measure their performance as well. When speaking about the business system ratios, this term refers to the tools that assist business people in evaluating the performance of the organization at the present time. Now you can detect if there are problem areas in your company that need attention. This way, you can deal with them before they can get out of hand.
To make things simpler to understand, the business system ratios denote the mathematical relations between various items in the business financial statements. In order for one to comprehend what this is all about, there is a need to be aware of what exactly these financial statements are. This is a requirement and this will enable you to get good decisions on your part. Meanwhile, there are several types of business system ratios but you can concentrate on the three chief sorts that are always included in the analysis of the business system performance regularly.
The first one is all about the liquidity ratios. These refer to the type that measures the capability of the business or the organization to meet the short term goals or the obligations set by the business owner. One of the ratios included here is the current ratio which is calculated by means of dividing the total current liabilities with the total current assets. If the current ratio is high, the business is believed to be more capable in achieving the goals. Those companies that have low current ratio should not fear about the issue of bankruptcy because they can make use of different methods that will enable them to secure their finances.
Leverage ratios on the other hand pertain to the measurement of the degree by which the company is financed by means of debt. One of the ratios here is equity ratio which can be calculated by dividing the owners' equity with the total long term debt. If the ratio between the debt and the equity ratio is high, there is a risk in which the interest costs of the debt will not be most likely covered by the ROI produced by the growth. The last one is activity ratios, which measure the effectiveness of the business when it comes to the utilization of the resources. This can include the inventory turnover ratio, which can be gauged by dividing the inventory with the number of sales. When the inventory turnover is low, this means that the company has poor sales and/or has excessive inventories. In the meantime, high ratio in this area would denote that the organization may either have high sales or just insufficient in inventories so that they can fully meet the demands of their customers.
These aspects should be constantly monitored and checked by the managers or the business owner in order to support the development and the growth of the company.
by: Willie Greg
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