Measuring Effectiveness – Term Paper Example

Measures of Effectiveness in Business Entities Most business organizations carry out ratio analyses to compare theactual performance with the predetermined or set goals. They also compare the previous performance to track record progress. Performance measure can be grouped into two namely, quantitative and qualitative. There are a number of measures and ratios used, by retailers, to measure the effectiveness of their daily operations. These encompass the following measuring ratios.
Profitability ratios
These help the retailers to determine the overall effectiveness of the owners or management on returns of the business entity generated on sale and other investment. The commonly used are gross profit margin which measures profits after consideration of cost of goods sold and net profit margin which measure profitability after taking care of all expenses of the entity into account (Vance, 2009).
Efficiency ratios
They evaluate turnover and return on investments. Therefore, they are important in decision making. Inventory turnover determine the frequency of stocking in the business entity. The level of efficiency increases as the frequency of stocking increase. Return on assets is used to compare net income to total assets. It helps show the efficiency of the management asset usage to generate income.
Solvency ratios
These ratios determine the ability of the business entities to raise capital and settle their financial obligations in time. They include leverages ratios in which banks normally consider when advancing loans and overdraft to businesses (Gunasekaran, 2005).
Lastly, liquidity ratios, they show the ability business entity to meet its current obligation. Therefore, it is important for all business entities to carry out performance measurement and evaluation as it helps decision making.
Work cited
Gunasekaran, A., H. James Williams, and Ronald E. McGaughey. "Performance Measurement and Costing System in New Enterprise." Technovation 25, no. 5 (May 2005): 523.
Vance, D.E. “Profitability ratios”. Ratios and other tools for analysis control and profit. Global Professional Pub. (2009)