By Mudalib Kassim
1st December 2014
Assignment 3: Final Accounts and Ratio Analysis
Task 3 (M3)
Explain how accounting ratios can be used to monitor the financial state of the organisation.
By using financial ratios you can calculate where your business is underperforming, and moderate the effects and changes in all the areas. Monitoring figures strongly will allow you to maximise efficiency in addition to significantly lower waste, which supports your company in the long run.
The working capital ratio will be also known as your 'current ratio', and also is amongst the most widely known performance connected with financial toughness. It indicates what quantity of money available to you in order to meet creditor’s needs.
You should use this specific ratio to determine whether or not your small business has sufficient current property to cover it is current with a margin of safety for failures that haven’t been seen yet, for instance lessened stock ranges or hard-to-collect obligations.
The higher the working capital ratio it is enhanced,. Any percentage of 2 or above shows you could have twice as many assets and also. This implies your business is performing well. A working capital percentage less than 1 suggests your business might be with issues and that they need to control the expenses.
Analyse the performance of the businesses under the headings of profitability, liquidity and efficiency
By analysing the figures in the accounts as a % we are better able to judge the performance of a firm. However most stakeholders want a more detailed idea of how the business is performing. There are some simple ratios which can be used to interpret the accounts more specifically. Three important sets of ratios are concerned with the Profitability, liquidity and efficiency of the business.
Profitability
For Business Alpha (Business A ) the Gross Profit Margin indicates it is at 13.4% which is not a high because the sales value and volumes are low. The Net...