Agriculture Reference
In-Depth Information
Agribusiness managers can use ratios to help monitor fi nancial position and performance.
Four areas are normally explored when fi nancial ratios are used to analyze a fi rm. These
areas are profi tability, liquidity, solvency, and effi ciency. The information provided on the
fi rm in each of these areas is presented below.
Profi tability ratios
:
Trends in revenues and expenses, such as sales, operating expenses, overhead costs, and
wages
The fi rm's success in terms of actual profi tability, trends in profi tability, and how the fi rm's
profi tability compares to other fi rms
The fi rm's use of resources to generate a return on equity suffi cient to satisfy current and
future investors
The fi rm's ability to repay long-term debts
Liquidity ratios
:
The fi rm's cash position; that is, its ability to meet current commitments, such as payrolls
and supply purchases
The ability of the fi rm to react to uncertainty in the marketplace
Solvency ratios:
The fi rm's capital structure and its ability to meet future plans to change and expand
The ability of the fi rm to deal with risk and absorb future losses
Effi ciency ratios
:
Trends in production and performance, measured in accordance with previously established
standards of effi ciency
The competency of the management team in terms of the proper fi nancial and operating use
of the resources of the fi rm
The fi rm's ability to be globally competitive in a constantly changing marketplace
Begin by establishing benchmarks
The interpretation of fi nancial information need not be a complex process. It is centered
largely on developing benchmarks or points of reference. Much information can be secured
by very simple procedures. One of the easiest ways to determine trends and identify prob-
lems or opportunities is simply to compare the current period with similar periods from the
past. Comparisons between last year's numbers and the current period or with an average
fi gure, or comparisons between the current month and the same month last year, or to trends,
may be useful.
At this point, an important concept should be noted. Financial analysis and records do
not solve problems or create opportunities—people do. All the analysis of records can
do is to help the manager ask the relevant questions in order to identify problems and
opportunities. Alternative courses of action or constraints to action may be suggested
and identifi ed, but these records alone do not have a cognitive value. The manager must
take specifi c actions based upon his or her fi nancial analysis for this process to be
useful.
