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Critical number - Assignment Example
Finance & Accounting
Pages 3 (753 words)
Part I (a) The sustainability of companies is dependent on managers being able to identify their weaknesses and taking corrective actions to fix problems. A good way to find alternative solutions to problems is by providing incentives to the employees and by using teamwork and cooperation…
The weakest ratio identified by management is the firm’s critical number. The ratios of the competition are calculated by retrieving the financial statements of the companies using the internet. Databases such as Dun & Bradstreet provide the ratios of the industries. It is beneficial for the employees of the company to think like owners. Employees that surpass the market in terms of performance should receive above market wages. Three incentives that managers can give its employees to help them improve upon its critical number are bonus programs, profit sharing or variable compensation. “Tying bonuses or profit-sharing to the critical number creates an insurance policy for the company that makes certain that we are all focusing on our biggest weakness” (Stack, 2010). Some potential critical numbers are debt to equity ratio, cash flow, sales per employee, gross margin, inventory turnover, and overhead. (b) Ratio analysis is a great tool to analyze the financial statements of a company. One of the greatest virtues of ratio analysis is comparability. Once the ratios of a company are calculated they can be compared against the results of other companies or against the industry standard. Despite all the pros of ratios analysis it also has its limitations. One of the limitations of ratio analysis is that it does not show trends in the performance of the company over time. ...
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