Most companies today use ratio comparatives to discover strengths and weaknesses. However, these are only tools to measure performance, not remedies to financial problems. It is the use to which you put these ratios that will determine their real value.
One important usage of financial ratios is for profit planning or “budgeting for profits.” Ideally, budgets that are prepared annually should undergo regular review throughout the budget year to determine that the company remains on course. Good budgeting involves a “profit objective” - a bottom-up approach whereby the company determines the desired profitability level and budgets expenses accordingly - and if reviews are planned regularly, any significant variances can result in rapid modifications for the remainder of the period in order to maximize profits.
In addition to the participation and cooperation on the part of the various managers who exercise control over their revenue or cost areas, the company’s annual budget process should give considerable attention to setting company norms that are at least equal to those prevailing in the industry. These standards are found in the annual ASA Operating Performance Report.
Companies that participate in ASA’s Operating Performance Report receive details of survey results in primary business segments in all the PHCP and PVF industries. Within each segment, data is shown for all participating firms, as well as by sales volume size and a special analysis that focuses on high profit firms is included. Each report also includes a 20-year trend report for each business segment. Participation is still open for the 2008 ASA Operating Performance Report.
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