Business success can be defined as "the achievement of business objectives". Measuring success will therefore depend on a business's objectives. For most businesses this is profit.
The financial performance ratios facilitate performance measurement between and within businesses. Note that such ratios are meaningless in isolation and should be assessed in relation to a comparator or benchmark, which could include:
- the previous year
- the budget
- an internal division or department
- a competitor.
LIMITATIONS OF RATIOS
Ratios do not provide answers to every question and their interpretation can be subjective. They are a useful guideline to business performance but only a starting point for a full analysis. They are generally calculated on historic accounting information, which may itself include assumptions and estimates.
OTHER INDICATORS OF SUCCESS
A variety of information will present the best overall picture of a business, such as
- other information included in a company's annual report (for public listed companies);
- the age and nature of a business;
- any recent changes in the business, such as new products or market; and
- any changes in the industry within which the business operates and the wider economy.
NON-FINANCIAL PERFORMANCE MEASURES (NFPM)
- market share,
- customer loyalty,
- quality, and
- investment in research and development.
Know the uses and limitations of financial performance ratios.