112 Essential Business Formulas and Ratios

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Published: 08th November 2012
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It’s all in the numbers. Everyone has heard this statement and it is true. Your performance is invariably judged by how much profit you create or by how much cost you incur in your segment, team, or department. The so-called bottom line—profit or loss—is the universal means for monitoring performance and for determining whether an initiative was worthwhile.

With the dominance of the bottom line in every aspect of how your performance is graded, you have a distinct advantage if you are skilled at conveying information in terms of profitability. Conversely, you are at a distinct disadvantage if you cannot communicate the profit or loss aspects of your work to management. On a most basic level, just asking management for something is less effective than demonstrating how an approval is going to create additional profits or cut costs (related directly to revenues) and expenses (overhead, not related directly to revenues). This is the rudimentary distinction between managers with communication skills and those who struggle every day trying to find the best way to communicate what they know and what they have achieved.

If you do not have background and education in finance, you probably struggle with these issues on a daily basis. Even those with training in accounting may find it difficult to summarize their requests in plain, simple, and clear terms for management. No one is immune from the difficulty in matching numerical information with a request or recommendation. For some, even if the numerical aspects of the job are comfortable, conveying their significance to management can be very difficult. For others, even those with exceptional communication skills, reducing the numbers (“crunching”) to the basics is the real challenge.

Your purpose in making effective use of numerical information is to convey the essential data that management needs to make an informed decision—and to make your case convincingly. Faced with an unending array of choices, management’s desire is to make choices that are not only the most profitable but that also involve the least risk. It is not enough to demonstrate that a decision is likely to be profitable if it also incurs unacceptable risks: potential liability, supply chain losses, reduced customer satisfaction, or damage to brand and reputation. When an esteemed company like Mattel contracted for its manufacturing in China but failed to properly supervise quality control, toys were sold in the United States containing harmful lead. The product cost aspects of this mistake were easily rectified. However, the reputation to the company, while less tangible, is likely to affect profits at an unknown level and for an unknown period of time. So the analysis of risk involves both tangible and intangible considerations, making it difficult to know how much risk is really involved in creating x profits as the result of y decisions.

What this means for you is that any communication is going to be based on an evaluation of profit and loss, many forms of risk, and the time required for return on investment, just to name a few considerations. How do you communicate the relevant facts to management? How do you reduce the research to well-supported recommendations or to caution statements? These are only a few of the issues you face in managing information and in massaging it to create an effective, simple, and honest method of communication.

We provide this 112 Essential Business Formulas and you can apply them to typical situations. The information enables you to more confidently and effectively include financial and statistical data in your reports and presentations and to provide convincing arguments to support your recommendations.

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