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Understanding management ratios

Management ratios are used as a practical means of assessing the quality of financial management, therefore identifying whether financial management is recognised as becoming either less or more efficient.

management ratios

The three main categories of management ratios include:

Cost and profitability ratios
Working capital ratios
Productivity ratios

What are Cost and Profitability Ratios

Cost and profitability ratios are a means of looking at the effectiveness of the way costs are being managed in relation to the turnover that has been achieved. This approach allows one to look at both movements and relationships between income, profit and costs. Changes in result may then be utilised in order to obtain a comparative analysis between periods of time such as months or years.

The methods required to work out cost and profitability ratios include dividing cost of sales by total sales income and multiplying this by 100 to get the production efficiency and dividing overheads by total sales income and multiplying by 100 to calculate management efficiency. Business efficiency is identified through dividing total costs by total sales income and multiply by 100 and profit efficiency is calculated by dividing net profit tax by total sales income and multiplying by 100.

What are Working Capital Ratios

Working capital ratios are used as a valuable means of identifying how efficiently a business is managing cash flows. In contrast to cost and profitability ratios, working capital ratios are measured as number of days as opposed to percentages. Working capital ratios also involve looking at the current ratio, debtor management ratio, creditor management ratio and inventory management ratio. It is crucial to manage inventory levels to ensure one’s business has sufficient materials necessary to meet customer demands at optimum operation.

What are Productivity Ratios

Productivity ratios are a means of investigating the various resources a business has employed with the aim of identifying associated benefits. The resources which contribute to business productivity may be divided into two groups including fixed or capital assets and personnel assets. Fixed assets include items required to produce products such as machinery, equipment, vehicles as well as premises. Personnel assets are often known as human resources and include workers employed within the business.

The performance of productivity ratios may be assessed through levels of productivity and profit through calculating fixed asset productivity ratios and payroll productivity ratios.

As highlighted above, there are three main categories of management ratios which include cost and profitability, working capital and productivity ratios. Each of these are calculated as a means of assessing the level of efficiency of financial management.

Tips for Surviving a Slow Economy

If your financial condition is under pressure due to the prevailing economic slowdown, consider the following ideas to manage your personal finance and your small business smartly to survive through the difficult times.

Tips on Personal Finance during a Slow Economy

Save money: Carefully study these truly comprehensive money saving guides provided at this link: 8 Money Saving Guides for the American Family These are serious money saving measures to cope up with a tough economy. So invest your valuable time in studying these guides. Implement the ideas that appeal the most to you and which are practically possible in your situation.
Do smart tax planning: Save on your income tax for the year. Make sure you avail of all the tax deductions that you are eligible for, including medical insurance premiums, higher education costs for the year if your annual income is below $65,000, credit for energy saving home improvement expenses, expenses incurred on investment and tax planning and retirement tax credits.
Refinance existing loans: In a slow economy the refinance interest rates are much lower than at the time when you may have raised the loan. Consider the option of home equity to reduce your debt obligations. It can help to refinance the mortgage on your home or an expensive auto loan for a much cheaper interest rate.
Avail the benefits of tax shelters: Increase your awareness about various tax shelters that can save you money on taxes in a perfectly legitimate way. Real estate, oil and gas investments, and appropriately structured equipment leasing costs are some of the common tax shelters available for your income.

Tips for Small Business during a Slow Economy

Reduce overheads: If your small business is suffering financial challenges due to shrinking demand or over-competition, it may be time to take austerity measures to survive through the tough phase. Reduce staff and put in extra hours yourself. If possible, engage your spouse for extra help instead of hiring staff. Opt for cheaper travel options, reduce gas and electricity expenses and eliminate wastages. Consider moving to a home office in case you are operating from rented commercial premises.
Negotiate with vendors: If the selling prices are under a squeeze, you need to go back to your suppliers and explain them the situation. Most likely your suppliers would not let your business come under pressure because their sales are also dependent on you. Every penny counts in tough times, so fight for the pennies, and dollars will automatically follow.
Provide more value for money: Instead of cutting down prices to retain customers, give them more of your product or services for the same price. This does not shrink the overall demand or overall volume of business, and effectively results in better financial mileage than simply reducing the prices and working on wafer thin margins.
Upgrade your skills: In a slowing economy, you need to work harder and perform maximum tasks on your own. So acquire knowledge about every aspect of your business so that you can reduce dependence on outsourcing of specialized services. Check out the Small Business Association’s free training materials and business tools to counter the effects of a slow economy.

With such efficient planning for your personal finances and small business, you can survive the challenges of an economic slowdown and emerge on top when the economic climate improves.

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