Why do you need this book?

• The form and logic
• Method
• The philosophy
• Excitement
• Data that make sense

And all I ask is a tall ship
And a star to steer her by.

JOHN MASEFIELD (1878–1967)

Why do you need this book?

Business ratios are the guiding stars for the management of enterprises; they provide their targets and standards. They are helpful to managers in directing them towards the most beneficial long-term strategies as well as towards effective short-term decision-making.

Conditions in any business operation change day by day and, in this dynamic situation, the ratios inform management about the most important issues requiring their immediate attention. By definition the ratios show the connections that exist between different parts of the business. They highlight the important interrelationships and the need for a proper balance between departments. A knowledge of the main ratios, therefore, will enable managers of different functions to work more easily together towards overall business objectives.

The common language of business is finance. Therefore, the most important ratios are those that are financially based. The manager will, of course, understand that the financial numbers are only a reflection of what is actually happening and that it is the reality not the ratios that must be managed.

The form and logic

This book is different from the majority of business books. You will see where the difference lies if you flip through the pages. It is not so much a text as a series of lectures captured in print – a major advantage of a good lecture being the visual supports.

It is difficult and tedious to try to absorb a complex subject by reading straight text only. Too much concentration is required and too great a load is placed on the memory. Indeed, it takes great perseverance to continue on to the end of a substantial text. It also takes a lot of time, and spare time is the one thing that busy managers do not have in quantity.

Diagrams and illustrations, on the other hand, add great power, enhancing both understanding and retention. They lighten the load and speed up progress. Furthermore, there is an elegance and form to this subject that can only be revealed by using powerful illustrations.

Managers operating in today’s ever more complex world have to assimilate more and more of its rules. They must absorb a lot of information quickly. They need effective methods of communication. This is the logic behind the layout of this book.

Method

There are many, many business ratios and each book on the subject gives a different set – or, at least, they look different.

We see a multitude of names, expressions and definitions, a myriad of financial terms and relationships, and this is bewildering. Many who make an attempt to find their way through the maze give up in despair.

The approach taken in this book is to ignore many ratios initially in order to concentrate on the few that are vital. These few, perhaps 20 in all, will be examined in depth. The reason for their importance, their method of calculation, the standards we should expect from them and, finally, their interrelationships will be explored. To use the analogy of the construction of a building, the steel frame will be put in place, the heavy beams will be hoisted into position and securely bolted together and only when this powerful skeleton is secure, will we even think about adding those extra rooms that might be useful. It is easy to bolt on as many subsidiary ratios as we wish once we have this very solid base.

The subject is noted for the multitude of qualifications and exceptions to almost every rule. It is these that cause confusion, even though, quite often, they are unimportant to the manager. (They are there because they have an accounting or legal importance.) Here, the main part of the book ignores most of these, but the ones that matter are mentioned in the appendices. Many statements will be made that are 95 per cent true – the 5 per cent that is left unsaid being of importance only to the specialist.

The philosophy

This golden rule cannot be overemphasized, and an understanding of its implications is vital to successful commercial operations. This is true for individual managers as well as for whole communities.

Excitement

Not only is this subject important for the promotion of the economic well-being of individuals and society, it is also exciting – it has almost become the greatest sport. Business provides all the thrills and excitement that competitive humankind craves. The proof of this is that the thrusts and counter-thrusts of the entrepreneurs provide the headlines in our daily press.

This book will link the return on financial resources into day-to-day operating parameters of the business. It will give these skills to managers from all backgrounds. The objective is that all the functions of production, marketing, distribution, etc. can exercise their specialist skills towards the common goal of financial excellence in their organizations.

Data that make sense

Managers, indeed, all of us, are deluged with business data. They come from internal operating reports, the daily Press, business magazines and many other sources. Much of these data are incomprehensible. We know the meaning of the words used separately, but, used collectively, they can be mystifying. Figure 1.1 illustrates the problem. The individual words ‘shares’, ‘profits’ and ‘cash flow’ are familiar to us, but we are not sure how they fit together to determine the viability of the business and articles written about the subject are not much help – they seem to come up with a new concept each month.

Is it possible to make the separate pieces shown in (a) into a coherent, comprehensive picture, as shown in (b)? The answer, for the most part, is ‘yes’.

The big issues in business are:

• assets
• profits
• growth
• cash flow.

These four variables have interconnecting links. There is a balance that can be maintained between them and, from this balance, will come corporate value. It is corporate value that is the reason for most business activity and, for this reason, this book focuses on the business ratios that determine corporate value.

Figure 1.1 Fitting data together for decision-making