By David E. Vance
Monetary research is ready shaping the long run. It offers the instruments administration must make subtle judgments approximately advanced and not easy enterprise concerns. As a company controller, leader monetary officer, and retired CPA, i discovered that out of doors auditors, paying for managers, accountants, and company executives have been making undesirable judgements simply because they did not know the way to use monetary research to real-world events. One instance was once a firm president who used to be signing rentals with a 24% imputed rate of interest simply because neither he nor his auditors understood how you can learn rentals.
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Additional resources for Financial Analysis and Decision Making : Tools and Techniques to Solve Financial Problems and Make Effective Business Decisions
2 $1,000,000 Suppose it is determined that the amount of assets it takes to generate a dollar of sales is excessive. Stated another way, suppose it is determined that the sales per dollar of assets is too low. What would be the next step in the analysis? The next step would be to analyze the performance of major assets: accounts receivable, inventory and plant, property and equipment, and determine whether they were being properly utilized. However, before analyzing assets, there is one more ratio that should be considered, and that is revenue per employee.
This gives rise to the identity Return on assets ϭ Return to creditors (interest) (Eq. 2–21) ϩ Return to preferred shareholders ϩ Return to common shareholders Example Suppose Alpha Corporation and Beta Corporation each had $1,000,000 in assets. The shareholders of Alpha Corporation put up the entire $1,000,000 as common equity. However, the shareholders Financial Ratios and Other Measures of Performance 33 of Beta Corporation invest only $500,000 in their company and borrow $500,000 at 12% interest.
Unproductive employees tie up assets in terms of plant, property, office and production equipment, computers, and vehicles. Unproductive employees also increase expenses unnecessarily. The appropriate level of revenue per employee will vary from industry to industry. In telemarketing, revenue per employee averages around $35,000 per year. In capital-intensive, high-tech industries, a revenue above $200,000 is not uncommon, and in law firms, revenue of $200,000 per lawyer is usually a minimum. Revenue Revenue per employee ϭ ᎏᎏᎏ Number of employees (Eq.