Forecasting and planning:
Ratio analysis will see the trends in the costs, sales and
profits of businesses such as Funtime and playtime. This is extremely useful as
businesses can forecast trends that may happen in the future and businesses can
plan their future activities which may be aims and objectives relative to their
A budget is a certain estimate of future activities that is
based upon past events occurred in the business and accounting ratios can help
the business understand their budgets. For example, Funtime and Playtime can
prepare a sales budget due to the help of the analysis of past sales.
Measurement of operating
Ratio analysis can show a business’s efficiency in terms of
their management and uses of its assets. As different ratios can indicate how
businesses operational efficiency is, the solvency of a firm can depend on the
sales revenue generated by utilizing its assets.
Communication is an important part of a business, as ratio
analysis is an effective way of communicating as its informs positions of and
progress made by the business which affects employees, owners and shareholders.
Control of performance and cost:
Ratio analysis can be used to control performance for
different departments in a business and controlling costs for different
departments too. For example, as playtime and Funtime are both businesses which
distribute apparatus and equipment for children’s play areas they will both
have different departments and the marketing department will both be pressured to
rely on their budgets and control it by the management team.
Inter firm comparison:
This is when businesses will compare the performance of two
or more firms which can reveal efficient and inefficient firms, thus it will
enable the inefficient firms to adapt their practices and measures for
improving their efficiency. This is extremely useful for playtime and Funtime as
they are both competing in the same markets.
Indication of liquidity position:
Ratio analysis will help businesses to assess its liquidity position
as these liquidity ratios can indicate the ability of the business to payback
credit by banks, creditors and suppliers of short term loans.
Indication of long term solvency position:
Ratio analysis is used to assess the businesses ability to
pay long term debts, the better the solvency position it will indicate the
businesses earning power and the functioning efficiency, the ratio analysis
shows the strengths and weaknesses in a business.
Indication of overall profitability:
The owners and management of Funtime and playtime are
constantly concerned with the overall profitability of their business as they
want to know whether the business has the ability to meet its long and short-term
obligations to creditors and such. This will secure the higher utilisation of
the assets of the firm.
Understanding failure of a business:
This is when a business fails to generate a profit and a
regular basis, thus meaning that the business is suffering severe liquidity crisis.
Ratio analysis can indicate the businesses expenses and liabilities which means
the business can get on top of this beforehand which can prevent the occurrence
Aid to decision- making:
Ratio analysis can help a business make a decision which
will impact the business rightly, for example, whether the business should
supply goods on credit to another firm or whether bank loans will be made
12: Simpler financial statements:
Ratio analysis can make the business documents easier to
grasp the relationship between different items and can help understanding the