FINANCIAL RATIOS Financial ratios are a financial "health checkup" for your company. Is the company healthy or is it a filmie "sick or anemic"? Just like an annual "health checkup", it gives you a base ine so that you know if you are staying healthy and can keep doing what you're doing or you need to make some changes to get "healthy" and on the right track. They are the metrics thar marketing managers look at to determine if the strategic decisions that have been made for the company are being successful or nof- is the company meeting the objectives they identified to keep the company competitive and profitable. These are the actual numbers and need to be compared to the budgeted (desired) numbers to see if you are actually on track with the decisions you are making. If you are not accomplishing your desired numbers, then you need to identify and address the reasons why and make necessary corrections. If you do not correct course, then these mistakes of Commission will turn into Mistakes of Omission and you are neglecting your responsibility and obligation you have to run your company effectively and profitably, which in the long run threatens the survival of yow company. Using the formula sheet and Income Statement for FRS, solve the following ratios. I have given you the interpretation of each ratio- in other words, what it's purpose is and what it is telling you about the company's performance. 1. Gross Margin Ratio Interpretation: How much of each dollar is left after subtracting COGS from sales. It is your Gross Profit Margin before operating expenses have been deducted 2. Net Income Ratio Interpretation: How much of each dollar earned by the company is pretax profit. Measures the profitability of your company and is used primarily internally 3. Operating Expense Ratio Interpretation: a measure of your operational financial efficiency. How much it costs to market or sell products vs. how much income they generate. A cost/benefit analysis 4. Returns and Allowances Ratio Interpretation: Can be a measure of customer dissatisfaction. You need to determine the reason they are returning items. Are your retum policies too lenient? Do you have low quality or obsolete products. Compare year to year to make sure the rate isn't increasing. It also depends on the size of the retailer - A 2% return rate for Walmart is very acceptable but a 2% return rate for a small mom and pop operator will likely put them out of business. 5. Inventory Turnover Ratio Interpretation: Determines how often you are selling your total inventory annually. A turn over rate of 2 times means that you are selling all of your inventory every 6 months. Is this good? Again, it depends on the business. If you own a flower shop - this is terrible and you won't stay in business. However, if you own a bigh.endjewelry store, this is probably acceptable. If you need to boost your inventory turnover, then you will implement strategies such as price incentives to get people to buy more frequently. 6. If FRS has a total investments of $1,000,000, then its Return on Investment is: Interpretation: You always want to have the highest ROI (profit margin) as possible, so this will influence your pricing strategics. If FRS is a high-end jewelry store, then they will increase ROI by charging higher prices because they have an inclastic consumer. However, if they are a lower priced, higher volume jewelry store, then they can't raise their prices, but must contain their costs because they have an elastic market demand or consumer. FINANCIAL RATIOS Financial ratios are a financial "health checkup" for your company. Is the company healthy or is it a filmie "sick or anemic"? Just like an annual "health checkup", it gives you a base ine so that you know if you are staying healthy and can keep doing what you're doing or you need to make some changes to get "healthy" and on the right track. They are the metrics thar marketing managers look at to determine if the strategic decisions that have been made for the company are being successful or nof- is the company meeting the objectives they identified to keep the company competitive and profitable. These are the actual numbers and need to be compared to the budgeted (desired) numbers to see if you are actually on track with the decisions you are making. If you are not accomplishing your desired numbers, then you need to identify and address the reasons why and make necessary corrections. If you do not correct course, then these mistakes of Commission will turn into Mistakes of Omission and you are neglecting your responsibility and obligation you have to run your company effectively and profitably, which in the long run threatens the survival of yow company. Using the formula sheet and Income Statement for FRS, solve the following ratios. I have given you the interpretation of each ratio- in other words, what it's purpose is and what it is telling you about the company's performance. 1. Gross Margin Ratio Interpretation: How much of each dollar is left after subtracting COGS from sales. It is your Gross Profit Margin before operating expenses have been deducted 2. Net Income Ratio Interpretation: How much of each dollar earned by the company is pretax profit. Measures the profitability of your company and is used primarily internally 3. Operating Expense Ratio Interpretation: a measure of your operational financial efficiency. How much it costs to market or sell products vs. how much income they generate. A cost/benefit analysis 4. Returns and Allowances Ratio Interpretation: Can be a measure of customer dissatisfaction. You need to determine the reason they are returning items. Are your retum policies too lenient? Do you have low quality or obsolete products. Compare year to year to make sure the rate isn't increasing. It also depends on the size of the retailer - A 2% return rate for Walmart is very acceptable but a 2% return rate for a small mom and pop operator will likely put them out of business. 5. Inventory Turnover Ratio Interpretation: Determines how often you are selling your total inventory annually. A turn over rate of 2 times means that you are selling all of your inventory every 6 months. Is this good? Again, it depends on the business. If you own a flower shop - this is terrible and you won't stay in business. However, if you own a bigh.endjewelry store, this is probably acceptable. If you need to boost your inventory turnover, then you will implement strategies such as price incentives to get people to buy more frequently. 6. If FRS has a total investments of $1,000,000, then its Return on Investment is: Interpretation: You always want to have the highest ROI (profit margin) as possible, so this will influence your pricing strategics. If FRS is a high-end jewelry store, then they will increase ROI by charging higher prices because they have an inclastic consumer. However, if they are a lower priced, higher volume jewelry store, then they can't raise their prices, but must contain their costs because they have an elastic market demand or consumer