Page 455 - Fundamentals of Management Myths Debunked (2017)_Flat

KeePing traCK:
What gets Controlled?

Countless activities are taking place in
different organizational locations and

functional areas!

1 Keeping track of an organization’s Finances

Want to earn a profit?

You need financial controls!

Traditional financial controls include:

• ratio analysis. (See Exhibit 14–6.)
Ratios are calculated using selected
information from the organization’s
balance sheet and income statement.
Ekaterina Semenova/Fotolia
Exhibit 14–6 Popular Financial Ratios
objeCtive ratio CalCulation Meaning
Current assets Tests the organization’s ability to meet
liquidity ratios: measure an Current ratio Current liabilities short-term obligations
organization’s ability to meet
its current debt obligations Acid test Current assets - Inventories Tests liquidity more accurately when inventories turn over
Current liabilities slowly or are difficult to sell
leverage ratios: Debt to assets Total debt The higher the ratio, the more leveraged the organization
examine the organization’s Total assets
use of debt to finance its as-
sets and whether it’s able to Times interest Profits before interest and taxes Measures how many times the organization is able to cover
meet the interest payments earned its interest expenses
on the debt Total interest charges
Sales The higher the ratio, the more efficiently inventory
Inventory turnover
activity ratios: assess how Inventory assets are being used
efficiently a company is The fewer assets used to achieve a given level of sales, the
using its assets Total asset turnover Sales more efficiently management is using the organization’s
Total assets total assets

Profitability ratios: Profit margin on Net profit after taxes
measure how efficiently and sales Total sales Identifies the profits that are being generated
effectively the company is
using its assets to generate Return on Net profit after taxes Measures the efficiency of assets to generate profits
profits investment Total assets

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