Every department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company’s suppliers and customers. Unfortunately, managers may not be aware of the multitude of measurements that can be used to track these different levels of performance or of the ways that these measurements can yield incorrect or misleading information. This post series is made to help managers (financial and non financial background) or business owner (or even any staff who is authorized to do) to select the best possible set of measurements ratio for a given situation.
This post series is filled with nearly 200 financial and operational measurements ratio formulas that have proven to be of considerable use in tracking the performance of many companies in a variety of industries.
Here are measurements and ratio formulas will be discussed through this topic:
Asset Utilization Measurements (Ratios): contains asset utilization measurements formulas that can be used to determine a company’s ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.
Operating Performance Measurements (Ratio): contains operating performance measurements, which describe an organization’s operating performance in such areas as sales, gross margins, investment income, operating profit, and net profit.
Cash Flow Measurements (Ratios): contains cash flow measurements, which are useful in determining the ability of a company’s cash flows to keep it in business. These measurements should be used in conjunction with the “Liquidity Measurements (Ratio)” in the other post, which focus on additional measurements related to cash flows, such as a company’s ability to collect accounts receivable in an efficient manner, use its inventory within a short time frame, pay its accounts payable when due, and generally maintain a sufficient amount of liquid funds to pay off short-term liabilities.
Capital Structure and Solvency Measurements (Ratios): contains capital structure and solvency measurements, which determine the relationship between a company’s debt and equity, as well as the comparative proportions of different types of stock. It also addresses a company’s ability to remain solvent and so can be used in conjunction with the “Cash Flow” and “Liquidity Ratio” .
Return on Investment Measurements (Ratios): contains return on investment measurements, which encompass net worth, several types of return on assets and equity, earnings per share, economic value added, and return on dividends.
Market Performance Measurements: addresses a company’s financial market performance by describing such measurements as the price/earnings ratio, several variations on the stock options to common shares ratio, market value added, and the cost of capital.
The rest post will cover measurements for individual departments. These post are devoted to performance measurements each following departments:
Measurements (Ratios) For Financial and Accounting Department
Measurements Formula (Ratios) For Engineering Department
Measurements (Ratios) Formula For Logistics Department
Measurements (Ratios) Formula For Production Department
Measurements (Ratios) Formula For Sales departments
In contrast to the previous posts, which are devoted to measurements that are primarily used by the accounting and finance functions, measurements for engineering department through the sales departments are more concerned with such issues as work capacity levels, efficiency, and effectiveness, which in many cases require no financial information at all. For example: Measurements for Logistics Department, which deals with logistics, cover such topics as production schedule accuracy, the on time parts delivery percentage, and picking accuracy for assembled products.
Cautions: This formula list should only be used when you really know the details to ensure their proper use. Without knowing the details, the measurement can be altered to yield incorrect results. Knowing the details is important in order to yield a more comprehensive set of information. Best use of this formula list is to search for a single calculation formula that somehow you forgotten, which can be used for highly targeted needs.
However, a better approach is to discuss them in more detail (its functionalities, formula descriptions, case examples and its cautions of course) of each ratio or measurement, with the objective of developing a complete set of measurements that will yield a more comprehensive view of a company’s entire operating and financial situation.
For example: a CFO might be interested in a company’s stock market performance and therefore watches only the price/earnings ratio. However, this single measurement focuses only on the perception of investors with regard to a company’s future earnings potential. A more rounded set of measurements might include the days of sales backlog (since it indicates future changes in sales volume), production capacity utilization (since it shows the ability of the company to produce its incoming sales), and the days of accounts receivable (since it shows the company’s ability to convert sales into cash).
The exact set of measurements will change in accordance with a company’s industry, size, operational configuration, and degree of financial leverage. But one issue will remain the same: A single measurement is not enough to yield a clear view of a company’s financial and operating condition. I wish I get more spare-time. But do nott worry, I am going to keep adding the “more detail explanations” one-by-one of each ratio/measurement set.
If you would like to see immediate more explanations for any specific (single) measurement (ratios), please submit a request through comment space provided below each post of the ratio and measurement set.
Now, let’s start exploring: