For any company to function in an ideal manner, it is important that financial details and statements be maintained that would result in management taking the correct decision in regards to business activities.
A very important tool to analyze a company’s financial problem is Ratio Analysis.
Benefits of Ratio Analysis:
As an important technique of analysis of financial statements, it has certain advantages over others.
- Allows intra-firm comparison:
With the help of this ratio analysis, financial interpretation of a firm over a certain time period can be made. Apart from that, this is also helpful in comparing different divisions of a single business association with back-up of various ratios.
- Helps in planning and forecasting certain business decisions:
Since ratio analysis is based on ratios that are framed against financial statements of the past, hence, it is based on those ratios that further financial decisions as budgets and policies are determined.
- Help in taking prime corrective measures:
Ratio analysis helps in depicting financial position of a company in past years. Hence, it provides details associated with success and failure of other companies and how that particular company concerned is placed in the market. Based on these details and financial data, certain corrective measures can be taken for betterment of a company.
- Coordinates business activities:
Since this analysis has a huge role to play in regards to providing financial statement of a company, hence it can be used by various departments of the company to create a harmonious relation between them and help in coordinating business activities.
Every management wishes that there be a certain sense of unity amongst its various departments so that in case of any business decision, a coordinate action can be taken. With presence of this analysis repost, coordination becomes better.
- Help in detailing and simplification of financial statement:
A financial statement presents summary of financial details during a certain time period. Generally, with ratio analysis, this becomes all the more easy to comprehend and work on.
- Helps in inter-firm comparison:
To determine exactly that position in which a particular firm stands in terms of its financial condition and market demands, it is imperative that a comparison with other firms in the same business field be made. Since actual figures are not used for comparative associations; hence, ratios are used to determine actual position of a company.
- Aids in decision making:
Known as efficiency surveyor, this presents a detailed analysis before a company stating whether correct utilization of assets is being made and whether that specific company has taken correct decisions in regards to their business aspects.
All these benefits help in making ratio analysis better and improve in business function of the firm.