IB Business and Management

3.6 – Improving Ratios

EVALUATING WAYS TO IMPROVE RATIOS

What you have to be able to do:

• Suggest ways to improve ratios• Explain how they will work• Identify any potential negative consequences

(side effects)• Identify if there are any conditions for the

suggestion to work

The basics……An easy way to think about ratios…..

You will always be trying to find a way to either increase ore decrease the result.So…..What would you need to do to increase the result?What would you need to do to decrease the result?

= result

It’s Simple…….To increase the result:

Number on the topORNumber on the Bottom

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑛 h𝑡 𝑒𝑡𝑜𝑝𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑛 h𝑡 𝑒𝑏𝑜𝑡𝑡𝑜𝑚

Incr

ease

Decreas

e

To decrease the result:

Number on the topORNumber on the Bottom

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑛 h𝑡 𝑒𝑡𝑜𝑝𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑛 h𝑡 𝑒𝑏𝑜𝑡𝑡𝑜𝑚

IncreaseD

ecre

ase

LETS WORK THROUGH AN EXAMPLE

Improving Stock Turnover Days

1. Do we want to increase or decrease this figure?2. Is increasing the COGS feasible? If so, how?3. Is decreasing the Ave. Stock feasible? Is so,

how?

2010 201364.37 Days 156.43 Days

Suggestions:

Reducing the Average Stock Levels• Reducing the stock levels that the firm keeps

– Ordering smaller quantities more regularly?– Better stock management system?

Increasing the COGS - By increasing sales NOT by increasing the cost of raw

materials!!

Are there any unwanted side effects of these options?Are there any other added bonuses?Will they definitely work? Or are there conditions/assumptions?

NOW IT’S YOUR TURN….

Work in pairsSplit the ratios between the groupsBrainstorm methods of improving the ratioConsider the side effects Consider the conditions/assumptionsBe prepared to share your ideas with the rest of the group.

Improving the GPM

How could Imperial improve this ratio?Are there any unwanted side effects of these methods

= x 100

Improving the NPM

How could Imperial improve this ratio?Are there any limitations of these methods

= x 100

Improving the Current Ratio

How could Imperial improve this ratio?Are there any limitations of these methods

=

Improving the Acid Test Ratio

How could Imperial improve this ratio?Are there any limitations of these methods

=

Improving ROCE

How could Imperial improve this ratio?Are there any limitations of these methods

=

Improving Gearing

How could Imperial improve this ratio?Are there any limitations of these methods

=