What’s Wrong With Standard Ratios?

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by Warren Hayford

You learned about standard ratios in Accounting or Finance or Marketing. These are ratios that have been developed and refined over time by managers, bankers and analysts to measure the performance and productivity of organizations. If you try to use these ratios to run your business you soon find that something is missing.

These ratios were created using the lowest common denominator between businesses. As a result, they are not specific enough to meet your every day needs. You need ratios to measure non-standard actions, business functions and unique span of control.

Non-standard Actions Standard ratios have to fit all organizations. As a result, performance measures of specific strategies, tactics and actions are not included. Productivity measures of only the most common resources, dollars and people, are included.

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As a result the measures do not cover the differences in businesses. A business which has only a direct sales force will use different ratios than one that has both a direct sales force and channels. You need to create the ratios you need to measure your actions and goals.

Non-standard Business Function Not every company organizes its efforts the same way. One manufacturer performs every aspect of production, but their competitor may outsource many of the steps and only assemble the final product. Another difference is that in some organizations business units are organized around the skill set and experience of the manager. As a result you may have no pure functions within your organization.

Standard ratios do not measure the way you are organized. You need ratios that measure the unique functions that make up your business. So you need to create ratios that meet your specific needs.

Non-standard Span of Control Business units within a company do not all have the same control over everything the company does. Therefore standard ratios often measure aspects of the business, the business unit can’t impact.

Standard ratios ignore span of control issues. They are defined from the perspective of the whole organization. Every business unit needs unique ratios that measure what the business unit can act on.

Create Unique Ratios To Measure Unique Aspects Of Your Business Standard ratios don’t meet all of the performance and productivity needs of an organization. Use standard ratios where they meet your needs.

Where they don’t you should create unique ratios to measure non–standard actions, business functions, and spans of control. The combination of standard and unique ratios will dramatically improve your insight into your organization’s performance.

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