Online Users

Custom Search

Categories

« Research Proposal - An Assessment of the Learning and Development Practices at the National Library and Informations Systems of Trinidad and Tobago (NALIS) - Is it done according to the training cycle? | Main | JIT: Cost Accounting and Cost Management Issues »

03/27/2012

APPLICATION OF RATIO ANALYSIS BY MANAGEMENT IN PLANNING & CONTROLLING COMPANY'S OPERATION


APPLICATION OF RATIO ANALYSIS BY MANAGEMENT IN PLANNING & CONTROLLING COMPANY'S OPERATION

 

There implies to the development of cost accounting and managerial control practices and assesses their relevance to the changing nature of industrial competition of today, the review of cost accounting developments, the opportunity for innovations in management control of financial ratios matter including planning criterion for evaluation of performance and formal budgeting and incentive plans. More recent developments have included discounted cash flow analysis and the application of management science and multiperson decision theory models. The cost accounting and management control procedures developed through years for mass production of standard products with high direct labor content may no longer be appropriate for the planning and control decisions of contemporary organizations. Also, problems with using profits as the prime criterion for motivating and evaluating short-term performance are becoming apparent.

Research is to advocate return to field-based research to discover the innovative practices being introduced by organizations successfully adapting to new organization and technology of ratio analysis cues. The overview is designed to put research process into broader perspective by analyzing issues of ratio forecasting and strategy formulation encountered in any meaningful application of such financial life cycle. Financial ratio is relative magnitude of selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders of firm and by firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. Ratios may be expressed as decimal value, ratios are usually quoted as percentages, ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers. Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows the statement of retained earnings and comprise the firm's accounting statements.

Financial ratios quantify many aspects of business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Ratios generally hold no meaning unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, competition is hard to compare. Financial ratios may not be directly comparable between companies that use different accounting methods or follow various standard accounting practices. Most public companies are required by law to use generally accepted accounting principles for their home countries, but private companies, partnerships and sole proprietorships may not use accrual basis accounting. Large multi-national corporations may use International Financial Reporting Standards to produce their financial statements, or they may use the generally accepted accounting principles of their home country. Financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option. There are ratios to measure the company's:

-          Financial health

-          Operating performance

-          Cash flows and liquidity

Business managers inside the organization can do ratio analysis to quickly spot problem areas. The analysis might, for example, indicate cash flow problems. It can further reveal that the cash flow problems arise mainly because of slow collection of dues from customers. Insider managers have access to much more information than what is available in financial statements. In the case of profitability ratios, for example, they have access to the detailed composition of the cost of goods sold. They can thus check which cost element is leading to high costs. They can also analyze the performance of individual business units, and do it on a monthly basis or more frequently. Financial ratio analysis is done to make sense of the massive amount of numbers presented in company financial statements. There are different categories of financial ratios that highlight different aspects of performance. Ratios reveal relationships that can help evaluate the performance of a company, so that investors can decide whether to invest in that company, analysis can also spot such problem area of operation so that managers can focus on the area.

comments powered by Disqus

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

Get posts by email address:

Delivered by FeedBurner








Blog powered by TypePad
Member since 09/2011