The Essential Controller: An Introduction to What Every Financial Manager Must Know, Second Edition

CHAPTER 6

Ratio and Trend Analysis

Importance of This Chapter

Frequently, the new controller walks into a situation where there is no consistently applied ratio analysis of any kind. If so, this is a great opportunity to formulate a company-wide measurement system to use as the basis for a new set of management reports within a few days of starting work. This chapter is filled with ratios from which to make selections.

This chapter describes the analysis of a business by using ratios and trends. The most common accounting measurements are included here; these are good for analyzing the balance sheet, the income statement, and relationships between the two. In addition, there are a number of performance measurements that do not directly relate to accounting, but rather to other functional areas, such as customer service, engineering, and materials management. These additional measures are necessary, because a controller cannot do an adequate job of maintaining systems, reporting on operating results, or recommending changes without a complete understanding of all company operations and how they interact. Consequently, the controller is well advised to develop a set of ratios and trend analyses for measurements that go beyond the usual accounting measurements to encompass the operating aspects of all departments. This chapter not only shows how to calculate each ratio, but also describes why each one is useful as well as any shortcomings it may have. The chapter concludes with ...