Odongo M.
Accounting -> How changes to the numerator and the denominator impacts on the ratio
How changes to the numerator and the denominator impacts on the ratio
Each of the ratios stated above has a numerator and a denominator. For example: Net profit/(average) Total assets. The net profit is the numerator and the total assets the denominator. The ratio will be improved by increasing net profit at a faster rate than total assets or decreasing net profit at a slower rate.
When discussing a change in a ratio you should:
measure the ratio
show how it was calculated
explain the changes to the numerator and denominator that caused the ratio to change
Looking at key items in the ratios in the tables above.
Net profit
May be increased by (for decreases reverse the increase/decrease below)
an increase in sales
a decrease in price, which may stimulate extra demand
an improved location
increased spending on advertising and sales wages
Advertising
better quality
more appropriate
increased spending
Product
quality
type
range
Customer focus
after sales services
pre sales service
extra services such as training
Cost of goods sold
buying in bulk - a decrease in buying costs, an increase in carrying costs
cheaper items, risk of sacrificing quality
more expensive items may have greater appeal leading to increased sales
the margin between the cost price and the selling price is an important factor in the success of a business
Expenses
increased efficiency should be sought in use of expenses
all expenses should be linked to the contribution they make to profit