Noted below are the three ways in which Ratio can help your Business. Let’s checkout what it has to say-
To assess whether there is any improvement in Current Financial Year as compared to the Previous Financial Year-
When we compare the ratio for current Financial Year with the similar ratio for a previous Financial Year, it is possible for us to detect whether there has been an improvement or degradation in the performance of the Organisation. Tracking particular ratios over time helps in detecting trends. Although the fact cannot be denied that the trading conditions & circumstances will differ for the periods being compared. But it will give a fair idea where the Business is heading, if the ratios are adjusted accordingly. There is yet another problem of inﬂation which may distort the ﬁgures on which the ratios are based. But appropriate adjustment before comparison will solve the problem to some extent.
To set the target for the upcoming Quarter & Comparing Variance
Not only has the Ratio helped in comparing the Current fiscal year with the Past Fiscal Year. It is equally helpful in making decision for the ongoing financial year. Some critical ratios like Current Ratio, Working Capital Ratio acts as a base for the future periods & helps in deciding the Business targets for the upcoming month or Quarter. Further setting up the ratio forehand also helps to analyse the Variance & Deviation where it went good & where it went wrong.
Comparison among the similar businesses
In the current Business environment, where the competition is intense & it’s a tough fight among the Business houses, a business must consider its performance in relation to that of other businesses operating in the same Industry. If the Business doesn’t do so then there can be a Question on its’s Survival, a comparable or better level of performance is must for the Business to survive in the long run. If the Business is not doing well in comparison to its Competitor, it might decide to change its strategy or so on. This required comparison will be facilitated by the Ratios.