Visitor Arrivals

According to the Provincial Tourism Office, a total of 1,775,531 visitors have

arrived in the province from January to December of 2013. The largest numbers
of visitors are domestic travelers with 1,721,257 and foreign tourist with 39,960.
Due to the cold weather of Tagaytay City that is a come-on for tourists, they
have the most number of visitors at 1,386,456, followed by Kawit with 167,083
tourists and Maragondon with 70,867 (Table 6.48).

KAWIT-

DOMESTIC 165, 373

FOREIGN 1710

TOTAL- 167,083\
-

HOW TO IMPROVE THE CURRENT RATIO?

FASTER CONVERSION CYCLE OF DEBTORS OR ACCOUNTS RECEIVABLES
Faster rolling of money via debtors will keep the current ratio in control. At least, the ratio will show a
correct picture if the debtors are liquid. A constant follow up with the debtors can improve the
collections from them. In the first dealing itself, the payment terms should be made clear and should
negotiate credit period as low as possible.
PAY OFF CURRENT LIABILITIES
Not only does the current ratio depend on current assets, it is equally dependent on the current
liability which is the denominator. They should be paid off as often and as early as possible. It would
decrease the level of current liabilities and therefore, improve the current ratio. Early payments to
creditors can save interest cost and earn discount which will have a direct impact on the profits of
the firm.
SELL-OFF UNPRODUCTIVE ASSETS
Cash level can be increased by selling unused fixed assets. Otherwise, the money is unnecessarily
blocked into them and idle money accrues interest cost.

IMPROVE CURRENT ASSET BY RISING SHAREHOLDERS FUNDS

When the current assets are financed by equity rather than the creditors, the level of current assets
would increase with current liabilities remaining the same. Consequently, this exercise will improve
the current ratio. Taking the improvement of current ratio into view, drawings are not advisable. It is
because drawings would reduce capital invested in the current assets and therefore the level of
current liabilities will increase to finance the current asset. All this directs impacts the current ratio. In
essence, owners fund i.e. capital and reserves and surpluses should remain invested in the firm to
balance the current ratio.

SWEEP BANK ACCOUNTS

First of all, the management of the firm should always try to cut down on hard cash levels and keep
the money in bank accounts. Facility of sweeping should be availed in the bank accounts which
almost every bank and the financial institution are providing. Sweeping is a facility by which excess
fund are transferred from current account to another account which fetches interest on that fund. At
the same time, these funds are available to use when required.

How to Increase Liquidity

by Eric Dontigney
 Related Articles
1How to Improve Inventory Turnover
2How to Improve Your Company's Efficiency
3The Impact of Technological Change on Business Activity
4Reasons for Decreasing the Gross Profit Margin and Increasing the Operating Profit Margin
Liquidity generally refers to a businesss ability to meet financial obligations as they come due. In other words, does
the total cash flow of the business exceed its total liabilities, such as loan payments, on a month-to-month basis?
Even if the answer is no, there are several ways a business can increase its liquidity to meet these obligations.
Ads by Google

Free Download
Convert To PDF With FileConvertor. Free!

fileconvertor.org

Overhead

Reducing overhead is one way a business can increase liquidity. Overhead costs or operating expenses include many
things that do not produce a profit, or do so only indirectly. Some common overhead expenses include rent, utilities,
insurance and professional fees, such as licenses or mandatory industry association memberships. Most businesses
can reduce some of these expenses. For example, long-term insurance policyholders can sometimes negotiate a
better rate. Automatic thermostats that raise or lower the temperature at the close of the business day often lower
utility costs.

Unnecessary Assets

Businesses can shed unnecessary assets to increase liquidity. Businesses sometimes hang on to assets after the assets
no longer generate a profit. For example, a business may own a small building in which it stores seldom used assets,
such as older equipment. If the equipment never gets puts to work, it should be sold or disposed of, which clears the
building for more productive ends. Rather than paying for upkeep on a building to store equipment, the business can
rent the building and create a new revenue stream, which improves liquidity.

Profit

No business should carry products or offer services that dont yield a profit. The only exception to this is when
doing so serves a specific philanthropic end to which the business is committed. For example, an accountant who
typically provides services only to companies earning seven figures or more may provide free tax services to local
churches or nonprofit organizations. Perform a review of all products and services to assess which ones yield a
profit. The business should either cut unprofitable products and services or increase their price, as long as they stay
within industry norms.

Accounts Management
Both accounts receivable and accounts payable impact liquidity. To increase liquidity, a business should consistently
review accounts receivable to make sure customers receive and pay bills on time. Delays in sending bills,
particularly in businesses without a fixed billing schedule, can severely inhibit cash flow and damage liquidity. In
terms of accounts payable, vendors sometimes offer a longer payment plan or installments when dealing with a
business. By lowering total payments due or spreading out the payments with longer intervals between bills, the
business can improve its liquidity.
Ads by Google

7 Ways to Improve Liquidity

Find out how to calculate your company's liquidity ratio
and how to improve it.

PAM NEWMAN

BUSINESS TRAVEL

3 Ways to Bootstrap Your Startup's Business Travel Budget

TONY TIE

STARTUP FINANCING

How to Finance a New Business by Rolling Over Your Retirement Funds

THE STAFF OF ENTREPRENEUR MEDIA, INC.

BUSINESS DEBT

Don't Let Student Debt Paired With Startup Debt Demolish Your Financial Ssecurity.
CRYSTAL OCULEE

---Shares


NOVEMBER 30, 2007

Liquidity is your company's ability to pay the bills as they come due. We've all heard the
saying "Cash is king," so here are seven quick and easy ways to improve your company's
liquidity.

1. Sweep accounts: Use sweep accounts through your financial institution. This will
allow you to earn interest on any excess cash balances by "sweeping" or transferring
the funds into an interest-bearing account when the funds aren't needed and sweeping
them back to your operating account when you do need them.

2. Overhead: Assess your overhead costs and see if there are opportunities to decrease
them. Lowering overhead has a direct impact on profitability. Overhead expenses,
including rent, advertising, indirect labor and professional fees, are indirect expenses
that you incur to operate the business outside of direct material and direct labor.

3. Unproductive assets: If you have unproductive assets that the business is just storing,
then it's time to get rid of them. The only reason you should spend money on assets
such as buildings, equipment and vehicles is to generate revenue.
4. Accounts receivable: Monitor accounts receivables effectively to ensure that you're
billing your clients properly and that you're receiving prompt payments.

5. Accounts payable: Negotiate longer payment terms with your vendors whenever
possible to keep your money longer.

6. Owner's draws: Monitor the amount of money that's being taken out of the business
for non-business purposes such as owner's draws. Taking too much money out can put
an unnecessary cash drain on the business.

7. Profitability: Review the profitability on your various products and services. Assess
where prices can be increased on a regular basis to maintain or increase profitability.
As your costs increase and markets change, prices may need to be adjusted as well.

Implement these seven easy tips in your business to improve your liquidity. It will help
ensure you have the proper cash flow levels for continued operations and company
growth. There are two main financial ratios used to measure a company's liquidity ratio.

1. Current ratio equals current assets divided by current liabilities. This should have a
target ratio of 2 to 3, which indicates you have adequate liquid funds to pay your
current obligations.

2. Quick ratio equals current assets (less inventory) divided by current liabilities. This
should have a target ratio of 1 to 2, which indicates your liquid funds without selling
your inventory.

You can find the balances of your current assets and current liabilities on your balance
sheet. Visit with your accountant if you need further guidance and analysis. Looking at
industry information also can help you assess how you compare to others in your specific
industry.
-

So how can you improve your liquidity ratios?

1. Early Invoice Submission:

Submit your invoices as quickly as possible to your customers. The more your
accounts receivables increase and the faster you receive money for your sales, the
better your current ratio will look and you will have enough cash. Give importance
to aging accounts and work hard to make the customers pay. Pay off some of your
own liabilities as quickly as possible, especially the minor ones that do not have
high money values. Having efficient accounts receivables processes in place will
help you in this direction.

2. Switch from Short-term debt to Long-term debt:

Use long-term debt to finance your business instead of short-term debt. Long-
term debt gives you the benefit of smaller monthly installments and lower interest
rates. The principal is also not due for repayment immediately. Removal of short-
term debt from your balance sheet allows you to have better Quick and Current
ratios, and allows you to save some of your liquidity in the near term and put it to
better use.

3. Get Rid of Useless Assets:

Every business has unproductive assets. I am sure that yours has too. It is just
lying there, wasting resources and not earning anything. It is time to get rid of
them. Try and get a good price for it. However, there are some assets that are not
worth anything in the market, and you would be better off just disposing of them
for whatever they are worth. After the sale, your cash balances would go up, you do
not have to account for depreciation, and the ratios would subsequently improve.

4. Control Your Overhead Expenses:

Examine how much you are spending on rent, labor, professional fees, marketing
and so on. You will be surprised how much of these are unnecessary. Cut back on
them and your short-term expenses automatically go down. The cash you are able
to retain in the business also increases. Soon, your Current and Quick ratios start
looking mighty impressive.

5. Negotiate for Longer Payment Cycles:

Some vendors are quite finicky about being paid quickly. But others are not. Try
and negotiate longer payment cycles with them. Get them to give you discounts.
You can hold on to your money longer and also pay a little less than what you
would have had to previously.
 Keep a watchful eye on those liquidity ratios. They are the lifeblood of the business.
Since they concern the short term, they are harder to solve and require urgent
measures to fix when they are in trouble. Businesses have gone broke for lack of
liquidity. Do not get into such a situation. Always make sure that you have a healthy
bank balance or at the very least, possess assets that can be converted to cash quickly.
A capable and efficient CFO service provider would provide you the assistance required
to ensure that your liquidity ratio is above par.

By Senthil Kumaran, Operations Manager - Finance and Accounting, Invensis Technologies November 13, 2015

How to Improve a Return on Total Assets

by Kevin Johnston

Related Articles
1How to Improve Return on Equity
2How to Improve Your Gross Profit
3How to Improve Net Margin
4Analysis of Low Profit Margin and Low Return on Assets
The only reason your business owns assets is to produce income. You measure your income in relation to your
assets. This is called return on assets, or ROA. Assets like equipment directly produce products that create income,
whereas buildings contribute indirectly to income, because they house income-producing equipment. You must
constantly find ways to reduce asset costs and increase income to keep your ROA as high as possible.
Ads by Google

Start Download - View PDF

Convert From Doc to PDF, PDF to Doc Simply With The Free Online App!

download.fromdoctopdf.com
 Your ROA Formula

Return on assets is a ratio you get by subtracting expenses from total revenues, then dividing this figure by the cost
of your assets. Total revenues encompass all money you get from sales. Expenses include overhead and variable
costs such as payroll. Your cost of assets includes anything your business owns, such as buildings, vehicles and
equipment.

Reducing Asset Costs

You can keep asset costs down by monitoring your asset expenses monthly. For example, inventory counts as an
asset for your ROA calculations. Reduce inventory costs by managing the levels of inventory to reflect your sales
expectations. Excessive inventory can raise asset costs without producing more income. You can reduce equipment
costs by renting or leasing equipment. This allows you to keep only equipment you need when you need it, instead
of buying a piece of equipment that may sit idle if your needs change.

Increasing Revenues

You must seek ways to increase revenues without increasing asset costs. For example, if you sell 20 percent more of
a product but had to increase your asset costs by 30 percent to buy the equipment to make the new product, you did
not increase your return on assets. Increase revenues through improved customer service or by exploring market
segments you have not sold to previously.

Reducing Expenses

Whenever you cut expenses, you increase the revenues you get to keep. This creates a higher return for you. Watch
for excessive payroll expenses, rising materials supplies and shipping costs that increase. You can reduce the
number of employees you need by improving productivity. Reduce the cost of materials by renegotiating with
suppliers or finding new suppliers. Lower shipping costs through renegotiation or by charging a shipping fee to
customers.

1. Small Business
2. Advertising & Marketing
3. New Product Marketing
How Can a Company Increase Its Return on Total Assets?
by Brian Hill
 Related Articles
1How to Improve a Return on Total Assets
2How to Improve Operating Profit Margin
3How to Improve Return on Equity
4What Does It Mean When Your Quick Ratio Is Below Industry?
Return on total assets measures how effectively a company is utilizing its assets to generate a profit. To calculate
return on total assets, divide net income after taxes for a period --such as a year -- by total assets at the end of the
period. The objective of acquiring assets is to put them to the most productive use -- meaning you generate the most
income from them. Whether the assets are financed by debt or equity, the company incurs a cost to hold them on the
balance sheet. Return on total assets is an important metric for a small-business owner to track and strive to increase.
Ads by Google

Start Download - View PDF

Convert From Doc to PDF, PDF to Doc Simply With The Free Online App!

download.fromdoctopdf.com

Reduce Asset Base

Periodically review all of the assets on your balance sheet. Decide if each asset contributes to revenue generation or
productivity gains. You may find you have obsolete inventory that can be liquidated for cash. The net effect will be
to reduce your company's asset base, and, assuming net income is unaffected, return on total assets will increase.
Idle plant and equipment are other candidates for liquidation so you can create a leaner, more efficient operation.
The cash you generate from these unused assets can be deployed to build your current operation, such as boosting
your marketing campaign or acquiring new equipment that improves productivity. Consider a sale-leaseback of
currently useful assets in which a finance company buys the asset and leases it back to you. The cash you generate
from the sale can be redeployed to increase revenue. If the financing cost is relatively low, the additional revenue
generated may exceed the incremental interest cost. With a lower asset base, the return on total assets will be
increased.

Improve Productivity And Lower Costs

Replace outmoded equipment and technology with updated versions that help your employees improve their
productivity -- which means generate more work product with the same human resources. Productivity increases can
result in a lower production cost per unit and an increase in gross margin that will fall to the bottom-line profit. The
higher profit may cause return on total assets to increase, even if the new equipment increases the total asset base
somewhat. Increase utilization of your company's physical plant by leasing out unused space in your office building
or in your manufacturing facility. A restaurant that serves only dinner, for example, could lease out its kitchen to a
caterer that specializes in lunchtime business functions. The incremental rental income falls to the bottom line
without any increase in total assets. Return on total assets will be higher.

Increase Sales Revenue

Raising revenue is an ongoing objective of all small businesses, but if you can accomplish this without increasing
your asset base, the positive effect on return on assets can be magnified, because there is no additional asset
financing cost to reduce net income. Review the current pricing of all of your major product or service lines.
Consider whether a price increase may only marginally reduce unit sales volume, resulting in higher-dollar sales
volume. Look at the gross margin on each of your major products. Shift marketing resources such as advertising to
those products with the higher profit margin. If you can keep total marketing expenditures constant while increasing
the dollar volume of gross margin, you will raise both profit and return on total assets.

Better Inventory Management

Look for ways of streamlining the manufacturing process and inventory planning system so the average dollar
amount of inventory can be reduced. This reduces your asset base and increases return on total assets. The just-in-
time inventory philosophy, for example, means that raw materials arrive just in time to be needed for production.
You may find that demand for your products is sufficiently stable that you can reduce the amount of safety stock of
inventory you keep to ensure you will be able to fill all orders that come in.

Improve Receivables Collection

Increased sales may not translate into higher profits if you are unable to collect the money due from customers --
your company's accounts receivable. Receivables tie up cash on your balance sheet, increasing your total asset base
and potentially reducing your return on total assets unless you can speed up collections. If you have some customers
who have purchased from you frequently but have proven to be slow payers, require a deposit from them on their
next order. You could also ask for cash-on-delivery terms. A more positive way of accomplishing the same objective
is to offer percentage discounts to customers who pay promptly.

-
5 Ways to Improve Return
on Equity
Here's how return on equity works, and 5 ways a company
can increase its return on equity.
Jordan Wathen

(TMFValueMagnet)

Jan 21, 2015 at 12:29PM

Return on equity is a must-know financial ratio. It explains, mathematically, the ratio of a

company's net income relative to its shareholder equity.

In essence, it captures the return a company generates on capital that is owned by the
shareholders.
A company can improve its return on equity in a number of ways, but here are the five
most common.
1. Use more financial leverage
Companies can finance themselves with debt and equity capital. By increasing the
amount of debt capital relative to its equity capital, a company can increase its return on
equity.
We'll use a (fictional) lemonade stand as an example for how the use of debt can
increase a company's return on equity. I've created financial statements for this
lemonade stand. The first shows a lemonade stand that is financed exclusively with
equity; the second shows what happens when the company is financed by equal
amounts of debt and equity.
Take particular notice of two things. First, the debt-free company earns more in after-tax
profits than the second company: $13 vs. $11.05. This is due to the fact that the second
company has an extra cost: pretax interest expense of $3 on its $100 of debt.
However, despite greater total profits, the first company has a lower return on equity of
6.5% compared to 11.05% for the second company. This is due to the fact that the
second company has shareholder's equity of only $100 compared to $200. Thus, when
you divide net income by shareholder's equity, you see that the second company has a
higher ROE due to its financial leverage.
Financial leverage increases a company's return on equity so long as the after-tax cost
of debt is lower than its return on equity.
2. Increase profit margins
As profits are in the numerator of the return on equity ratio, increasing profits relative to
equity increases a company's return on equity. Increasing profits does not necessarily
have to come from selling more product. It can also come from increasing prices of
each product sold, lowering the cost of goods sold, reducing its overhead expenses, or
a combination of each.
To explain how profit margins affect return on equity, I've constructed financial
statements for a lemonade stand before and after a price increase. The only difference
in the financials for these companies is at the revenue line. The first records $100 in
revenue; the second records $120 of revenue. Everything else is the same.

Notice that the company earns $13 in profits from $100 in sales before the price
increase, resulting in 13% profit margins. The second generates $26 in profits on $120
in sales, and thus earns a profit margin of 21.7%.
The net result is that after increasing prices, which increases profits, the company earns
a higher return on equity after raising prices (13%) than it did before the price increase
(6.5%).
3. Improve asset turnover
Asset turnover is a measure of a company's efficiency. You can calculate it by dividing
sales by the company's total assets. In general, the more sales a company produces
relative to its assets, the more profitable it should be, and the higher return on equity it
should earn.
To show how this can impact return on equity, I'll use the lemonade stand example once
more. The first company is an inefficient operator. It has poor inventory controls, and
thus it tends to carry more inventory than it can use right now. The second company is
an efficient operator which carefully plans its budgeting, and buys inventory just days in
advance, allowing it to use fewer total assets to generate the same amount of sales.
The lemonade stands have asset turnover ratios of 0.5 and 1.0, respectively. Not
surprisingly, the second company also has a higher return on equity of 13%, compared
to 6.5% for its less efficient rival.
4. Distribute idle cash
This is becoming a common problem among corporate giants, particularly those in the
technology industry: idle cash in excess of what the business needs to continue
operations reduces the apparent profitability of the company when measured by return
on equity.
Distributing idle cash to shareholders is effectively a way to leverage a company, and
boost its return on equity. To demonstrate, I'll use the lemonade stand example, with
and without idle cash on the balance sheet.
The only difference in this example is how much idle cash is sitting on the balance
sheet. When cash piles up on a company's balance sheet, it can drag down a
company's return on equity. This is why it's very important to consider a company's
financial leverage when analyzing a company's return on equity.
Even the best and most profitable businesses will generate a low return on equity if they
have a lot of excess cash on their balance sheets. This is why so many cash-rich
companies with low ROEs but sound business performance become the target of
activist investors.
5. Lower taxes
Who doesn't want to pay a lower tax rate? Most of corporate America does. And many
are using tax strategies to help them reduce their tax rate.
In every example so far, I've used a 35% tax rate. Modifying it to 30%, 20%, or even 0%
would obviously increase profits and return on equity in every single example. The lower
the tax rate, the higher the profits, all else equal.
Today, low tax rates often artificially increase a company's return on equity. Many
companies do business overseas, where they pay a lower tax rate than they would in
the United States.
However, the difference is usually temporary. When and if a company brings its profits
back to the U.S. to pay dividends or buy back shares, it will have to pay a tax rate that is
consistent with the corporate average of roughly 35%. Be wary of American companies
which have a lower tax rate than the corporate average. Their profits may be
temporarily inflated by taxes they haven't paid, but will pay in the future.
The $16,122 Social Security bonus you could be missing
If you're like most Americans, you're a few years (or more) behind on your retirement
savings. But a handful of little-known "Social Security secrets" could help ensure a
boost in your retirement income. For example: one easy trick could pay you as much as
$16,122 more... each year! Once you learn how to maximize your Social Security
benefits, we think you could retire confidently with the peace of mind we're all
after. Simply click here to discover how to learn more about these strategies.

HOW TO IMPROVE ASSET TURNOVER RATIO

If a company analyzes that its asset turnover ratio is declining over time, there are several ways in
which the asset turnover ratio can be improved:

INCREASE REVENUE
The easiest way to improve asset turnover ratio is to focus on increasing revenue. The assets might be properly
utilized, but the sales could be slow resulting in a low asset turnover ratio. The company needs to increase its
sales by more promotions and by quick movements of the finished goods.
LIQUIDATE ASSETS
Obsolete or unused assets should be liquidated quickly. Assets, that are not used frequently, should be
analyzed to see whether there is a sense in retaining those. Basically, the company should sell those assets that
do not add to the bottom line regularly.
LEASING
Another efficient way is to lease assets, instead of buying them. Any leased equipment is not counted as a
fixed asset.
IMPROVE EFFICIENCY
The asset turnover ratio could be low because of inefficient use of assets. The company should analyze how
the assets are used and ways to improve the productivity of each asset. The output should increase without any
significant increase in any other expenses.
ACCELERATE ACCOUNTS RECEIVABLES
The Slow collection of accounts receivables will lower the sales in the period, hence reducing the asset
turnover ratio. The company should focus on quick collection practices. This can include outsourcing the
delinquent accounts to a collection agency, hiring an employee just for collecting pending invoices and
reducing the amount of time given to customers to pay.
BETTER INVENTORY MANAGEMENT
The company needs to check its inventory management to figure out the time spent in the movement of the
goods throughout the process. If the companys delivery system is slow, there will be delays in getting the
product to the customer and collecting the payment on time. The company should invest in technology and
automate the order, billing and inventory systems. This will improve the sales and increase the asset turnover
ratio.
Conclusion
Companies need to keep a track on the asset turnover ratio. This ratio helps the company to
measure how productive the business is and how much revenue is generated from its investment in
the assets. A high asset turnover ratio is a sign of a better and efficient management of assets on
hand. So, the companies need to analyze and improve their asset turnover ratio at regular intervals.

DEFINITION OF DEBT TO TOTAL ASSET RATIO

Debt to Total Asset Ratio is a solvency ratio that evaluates the total liabilities of a company as a
percentage of its total assets. It is calculated by dividing the total debt or liabilities by the total assets.
This ratio aims to measure the ability of a company to pay off its debt with its assets. To put it simply,
it determines how many assets should be sold to pay off the total debt of the company. This is also
termed as measuring financial leverage of the company.
HOW TO INTERPRET DEBT TO TOTAL ASSET RATIO?
There is a general practice of showing the debt to total asset ratio in the decimal format and ranges

from 0.00 to 1.00. A ratio of 0.5 indicates that

half of the total assets of the company are financed by the liabilities. In other words, the debt is only
50% of the total assets.

A lower value of the ratio is better than a higher number. A lower ratio signals a stable company with
a lower proportion of debt. A higher ratio means that a higher percentage of the assets can be
claimed by the companys creditors. This translates into higher operational risk as financing new
projects will get difficult. Companies with higher debt to total asset ratio should look at equity
financing instead.
 WHY IS IT NECESSARY TO IMPROVE DEBT TO TOTAL
ASSET RATIO?
A higher debt to total asset ratio is very unfavorable for a company.

Firstly, it indicates that a higher percentage of assets are financed through debt. This means that the creditors
have more claims on the companys assets.
Secondly, a higher ratio increases the difficulty of getting loans for new projects as the lenders will see the
company as a risky asset.
Thirdly, a higher debt to total asset ratio also increases the insolvency risk. If the company is liquidated, it
might not be able to pay off all the liabilities with its assets.
Therefore, it is imperative that the company works towards improving the debt to total asset ratio.

HOW TO IMPROVE DEBT TO TOTAL ASSET RATIO?

If a company has a higher debt to total asset ratio, it needs to lower the same. The company should
reduce the debt proportion to lower the ratio. However, it can also follow several other options to
improve the debt to total asset ratio:

ADDITIONAL/ NEW STOCK ISSUE

The company can issue new or additional shares to increase the cash flow. This cash can be used to repay the
existing liabilities and in turn, reduce the debt burden. The reduction in debt will lower the debt to total asset
ratio.
DEBT / EQUITY SWAP
By implementing a debt/equity swap, a company can make a debt holder an equity shareholder in the
company. This will cancel the debt owed to him and in turn, reduce the debt of the company and improve the
ratio. If planned in advance, convertible debentures can be issued.
LEASE ASSETS
The company can sell its assets and then lease them back. This will induce a cash flow that can be used to pay
off some debts.
INCREASE THE SALES
The company can focus heavily on increasing the sales but without any increase in overhead expenses. The
increase in sales can be used to reduce the debt and improve the debt to total asset ratio.
Conclusion
Debt to Total Asset Ratio is an important solvency ratio. The company needs to monitor this ratio
regularly as creditors will always keep an eye on this ratio. The creditors are worried about getting
their money back and a higher debt to total assets ratio will translate into no loans for new projects.
Thus, the company should always aim to keep the ratio in an acceptable range.

-
What are some strategies
companies commonly use to
reduce their debt to capital
ratio?
By J.B. Maverick | April 7, 2015 3:11 PM EDT

SHARE

A:
Companies can take steps to reduce and improve their debt to capital ratios.
Among the strategies that can be employed are increasing sales profitability,
better management of inventory and restructuring debt.

The debt to capital ratio is a financial leverage ratio, similar to the debt to equity
(D/E) ratio, that compares a company's total debt to its total capital composed
of debt financing and equity. This metric provides an indication of a company's
overall financial soundness, as well as revealing the proportionate levels of debt
and equity financing. A value of 0.5 or less is considered good, while any value
greater than 1 shows a company as being technically insolvent.

The most logical step a company can take to reduce its debt to capital ratio is
that of increasing sales revenues and profitability. This can be achieved by
raising prices, increasing sales or reducing costs. The extra cash generated can
then be used to pay off existing debt.

Another measure that can be taken to reduce the debt to capital ratio is more
effective management of inventory. Inventory can take up a very sizable amount
of a company's working capital. Maintaining unnecessarily high levels of
inventory beyond what is required to fill customer orders in a timely fashion is a
waste of cash flow. Companies can examine the days sales of inventory (DSI)
ratio, part of the cash conversion cycle (CCC), to determine how efficiently
inventory is being managed.

Restructuring debt provides another way to increase capital and reduce the debt
to capital ratio. If a company is largely financed at high interest rates, and current
interest rates are significantly lower, the company can seek to refinance its
existing debt at lower rates. This will reduce both interest expenses and monthly
payments, improving the company's bottom-line profitability and improve cash
flow.

Read more: What are some strategies companies commonly use to reduce their debt to
capital ratio? | Investopedia http://www.investopedia.com/ask/answers/040715/what-are-
some-strategies-companies-commonly-use-reduce-their-debt-capital-
ratio.asp#ixzz4f95VmyZq
Follow us: Investopedia on Facebook

6 Strategies for Reducing Debt

Originally published: 05.01.13 by Ruth King

If your company has too much debt, here are six debt-reduction strategies:

1. Increase profitable sales.

Assuming you know your costs and can increase your margins and sales volume without
increasing overhead expenses, this increases your bottom line. When you collect for those
sales, you can use the extra cash to pay back debt.

2. Ask your employees how to reduce overhead.

They know where the waste is. They may not tell you. However, they do know when time,
materials, and overhead are being wasted. Heres how to ask: What would you do to reduce
overhead by $100 per month? If you implemented all of the ideas from all of your
employees, then youd significantly reduce overhead each month; thus reducing your
accounts payable each month, increasing your bottom line, and therefore equity.
3. Watch inventory.
Inventory is a bet. It is one of the biggest uses of cash for most contractors. Many times
your technicians have the parts on their trucks but it is easier for them to run to the supply
house than find the part. When they use the parts on their trucks, then you dont incur an
additional payable for an unnecessary part.

4. Restructure debt.
Restructuring debt doesnt necessarily reduce the debt you owe. However, it can increase
cash and disposable income. If you find that you dont have the cash to pay your debts,
then talk with the creditor. See if a supplier will extend terms giving you longer to pay the
bills and reduce the monthly payments.
Interest rates are low. If you have a high interest loan, see if you can restructure it to reduce
the interest rate. It doesnt change the amount of principal you owe. It does decrease your
interest expense, which increases your bottom line and equity, thus reducing your debt-to-
equity ratio.

5. Sell assets and lease them back.

Sometimes you can reduce debt by selling the asset (assuming the asset has more value
than the amount owed on it) and leasing the asset back. Ive seen this successfully used
when owners convert their trucks from owning them to leasing them.

6. Bring in an investor.
This is my least-favorite option. However, you might want a partner who can take over a
certain segment of your business. As an equity investment, your debt-to-equity ratio
decreases.
Implementation of one or more of these strategies will help you to reduce your companys
debt.

How to Keep the Debt-Equity Ratio Stable With Revenue

Growth
by Fraser Sherman
 Related Articles
1How to Improve Return on Equity
2How to Improve a Return on Total Assets
3Remedy for Low Asset Turnover
4How to Improve Inventory Turnover
Debt-equity ratio is one of the ways to measure your business's financial health. Dividing total liabilities by the
owners' equity shows how much of the company's assets are tied up in debt. If the company is worth $18 million and
the debt/equity breakdown is $12 million/$6 million, the ratio is 2. The higher the ratio, the more indebted the firm.
Some debt/equity ratios plug in only long-term debt rather than all debt.
Ads by Google

Web Designer Philippines

Professional Website For P14,950. eCommerce For P22,950. Inquire Now!

halcyonwebdesign.com.ph

Expansion and Debt

It's possible to grow your company by borrowing money to fuel an expansion. Too much debt, however, poses a
risk. In the 1990s, several telecoms expanded by increasing their debt loads, confident they'd end up growing
revenue so they could pay off the debt down the road. It didn't work out that way, which left them with restricted
their options later. If you're expanding, but your debt ratio is growing too, that's a sign your growth is fueled
primarily by debt rather than substance. That's a risky strategy because companies can't sustain debt-fueled growth
indefinitely.

Equity Growth.

If your growth is affordable, it shouldn't be ratcheting up your debt/equity ratio. Increases in revenue can keep the
ratio stable; as your sales increase, you reinvest the money in the company, adding assets or paying down debt. That
increases equity, which keeps the debt/equity ratio down. "Entrepreneur" magazine says company sales and
company assets should grow at the same rate. If sales revenue doubles, then the company assets should double too.
That way, even if you borrow more money, the debt/equity ratio won't explode.

Benefits of Stability

Keeping the debt/equity ratio stable has other benefits. When you do decide to borrow money, it's one of the
measures the lender's going to look at to decide if the company's a safe bet. If your ratio is too large, the bank may
decide that you already have more debt than you can handle. Equity investors use the same standard and may have
the same reaction. In the long run, not borrowing lots of money makes it easier to find financing when you really
need it.

Overloading on Equity

You can use your revenue growth to pay down and eliminate debt, but that's not necessarily the best choice either.
Debt has some advantages as fuel for expansion. You can deduct the interest on your loans as a business expense.
Unlike bringing in a new equity investor, your creditors don't get a say in how you run the company. As long as the
debt stays manageable, it can be a good way to keep the firm growing. Keeping the debt/equity ratio stable shows
you're not playing it too safe and passing up chances to grow.

Planning Well

When you're looking at next year or the next five years, you have to make assumptions about your company's
performance. That may include taking on debt in the belief growth will increase revenue, which will let you keep the
debt/equity ratio stable. It's important to consider a worst case scenario, where the revenue growth is substantially
under what you expect. Ask yourself whether, if that happened, you could maintain the debt payments without
seriously cutting into your cash flow. If you're in a capital intensive field, such as manufacturing, you may have to
take on a higher ratio to borrow for new equipment. In that case you should work out a payment plan that will let
you recover and restabilize the ratio.

-
o how do you get a better grasp on your gross margin and improve your overall profits? Here are 6
tried-and-true ways you can start improving your profit margin today:

1. Increase Prices

Most small business owners feel that if they raise prices, they will quickly lose customers, thus
offsetting any additional profit they might earn. Though this is not always a favorite of small
business owners, raising prices can actually work to your advantage.

Do a thorough study of your competition. Don't just price your products to match competition.
Instead, find out what the competition offers, and then offer something better. That may simply be
focusing your products to serve a niche clientele, or structuring your product line to attract
"boutique" type of customer base. Whatever the case, if you are going to raise your prices, you
must improve your product.

2. Reduce Direct Costs of Goods

 To increase gross margin, you can increase your prices, but you may also try reducing the amount
you pay for the goods you sell as well. This may require negotiating with your suppliers for better
deals.

Consider asking your distributors for lower prices. Can you purchase more product in bulk? That is
leverage you can use to lower prices. Have you been a long-term trustworthy customer? Another
mark in your corner to help you get better results.

It may ultimately take a bit of research to find alternative suppliers who will give you better deals.
However, finding ways to reduce the amount you pay for goods or materials will help you increase
your profit.

3. Reduce Inventory Waste

Get ready to forecast and plan your inventory much more efficiently. Many small businesses suffer
because they lose a lot of money due to wasted inventory, spoilage, or even pilfering. Manage your
inventory better, and you'll have more product to sell.

4. Readjust Your Sales Mix

Do you sell a number of different products or services? Find the ones that offer the highest gross
profit margins. You may find that your business focus may change as you readjust your mix to find
the right combination of profitable products.

5. Integrate New Products or Services

Of course, if your business sells only one or two types of products, consider adding additional
product lines or services. But if you choose to integrate, be careful how you select new products.
Will it complement your current business? Will it require more focus to sell? And ultimately, will it
bring in new customers and consequently more revenue?

6. Alter Your Business Focus

Sometimes a business must simply change its focus to become more profitable. For instance, say a
photographer starts a business to take portraits and landscapes. The demand for these types of
products is low and competition is high. But changing a focus to wedding documentary photography
can add tremendous amounts of business.

A small business should not have a sufferable cash flow needlessly. Consider these options to help
increase your gross margin, and you may find that your small business starts making more money right
away.

How to Increase Gross Margin

by Neil Kokemuller
 RELATED ARTICLES

Why Is Inventory Important for a Business?

Cost Leadership and Competitive Advantage
Reasons for Gross Margin to Be Down
Advantages and Disadvantages of Product Differentiation
What Does a Low Gross Profit Percentage Mean?
The Disadvantages of an Everyday Low Pricing Strategy

Gross margin is the percentage of your revenue that remains after costs of goods sold are
subtracted. A gross profit of $10,000 on $30,000 in revenue, for instance, equals roughly 33 percent.
High margins are important to covering fixed costs and earning a net profit. If your margin is below
industry averages, or on the decline, you have several options to try to improve it.
Sponsored Link
Start Download - View PDF download.fromdoctopdf.com

Convert From Doc to PDF, PDF to Doc Simply With The Free Online App!

Marketing
Investing in marketing adds to your operating expenses, which can limit net earning potential in the
short run, but it can drive more traffic to your business. This helps you generate more sales and
maintain higher price points. By building up the perceived value of your brand and products through
effective marketing, you should get customers to pay premium prices or buy higher end items
without increasing your product acquisition.

Sales
Developing a more effective sales process and a talented sales force can also help you achieve
higher revenue on each sale. Selling complex, higher end solutions is generally more challenging
than selling with a low-cost emphasis. You need salespeople that ask good questions, understand
customer needs and effectively sell the value of your products and services to match. Good
salespeople avoid the temptation to negotiate on price and instead sell value and quality to
customers.

Cost Reduction
Negotiating lower costs for materials or products from your suppliers helps you lower your costs of
goods sold. If you can keep the same price points in the market, your gross profits and margins go
up. Building ongoing, trusting relationships with suppliers gives you an edge when bargaining. You
might be able to shop around and find suppliers with better rates. If you can commit to purchasing
more products at a time, your cost per item may be lowered as well.

Better Inventory Management

Improving your inventory buying can also help your gross margin. Buying inventory from suppliers
when prices are favorable helps you lower acquisition costs. Using just-in-time processes to meet
customer demand while avoiding excess inventory is also important. Stock outs equal missed sales
opportunities and alienated customers. Excess inventory leads to sales discounts and waste, both of
which negatively affect gross margins. A well-balanced inventory helps with both variable in the
gross margin equation. Lost or stolen inventory is also a problem since you have to account for the
costs of goods sold, but generate no revenue.
Sponsored links

How to Improve Net Margin

by Tim Plaehn
 Related Articles
1How to Improve Your Gross Profit
2How to Affect Net Profits
3Factors That Contribute to the Change in Net Profit Margin
4How to Improve Operating Profit Margin
As a small-business owner, you can view the net profit margin as your reward for running a successful company.
The profit margin is money you can use to pay yourself or reinvest to expand your company. Many forces --
customers, costs and expenses -- work against your accumulation of profits, so you need to focus on tactics and
strategies to maintain and increase your profit margin.
Ads by Google

Cheap Web Development

Professional Website For P14,950. eCommerce For P22,950. Inquire Now!

halcyonwebdesign.com.ph

Profit Margin Defined

Your total revenue or sales minus the cost of goods sold gives your gross profit margin. Out of your gross profits are
paid the expenses of running your business, such as rent and salaries. The remaining money after the expenses are
paid will be your net profit margin. You can calculate the gross profit and net profit margins as percentages to see if
these margins are improving or shrinking. For example, if your sales for the year are $1 million and the net profit is
$150,000, you have a net profit margin of 15 percent. If you can increase that margin by 1 percent, your profits
would increase by $10,000.

Analyze Your Customers

A 2008 study published by business consultants Deloitte showed that 20 percent of a company's customer base
produces most of the profits. A breakdown of the types of customers your business serves should allow you to
determine what customers are in that most profitable group. Focus on offering the services or products these
customers buy. You may even decide to eliminate those products that your ultimately unprofitable customers tend to
purchase. As a small business, you do not need to be able to satisfy the wants of every prospect that walks through
the door.

Analyze Your Product Lineup

With the selection of products you sell, you have several ways to increase your profit margin. You can adjust prices
upward to increase the gross profit margin, or you might want to lower some prices to increase the volume of sales
and the net profits. You may be able to eliminate some products to focus on those that sell well and are profitable, or
you may want to add some products to increase cross-selling and up-selling opportunities. Do not let your product
lineup get stale. Add new products and weed out those that are no longer profit generators.

Cut Those Expenses

As a business grows, it is possible for the expenses to grow faster than the gross profits from sales, cutting into the
net profit margin. The most enjoyable side of running your own business involves satisfying customers and
increasing sales numbers. Digging through the expenses to find where reductions can be made seems more like hard
work, but it's essential if you want to increase your net profit margin. You can better understand your expenses if
you calculate what portion of an increase in your gross profit margin ends up in your net profit margin.
Ads by Google

What are the best ways for a

company to improve its net
margin?
By Investopedia | April 2, 2015 4:11 PM EDT

SHARE

A:
The goal of any business is to improve its net margin. Also called the net profit
margin, this profitability metric is the most comprehensive evaluative ratio used in
corporate finance. By dividing net profit by total sales, the net margin reflects a
company's ability to turn revenue into profit after accounting for all the expenses
of running the business, including taxes and debt payments. When a company's
net margin exceeds the average for its industry, it is said to have a competitive
advantage, meaning it is more successful than other companies that have similar
operations. While the average net margin for different industries varies widely,
the manner in which businesses can gain a competitive advantage remains
constant: increase sales or reduce expenses.

Improving the net margin through increasing revenue is generally the most
popular option. Businesses can increase sales income by raising the price of
products or by selling more of them. However, businesses must be wary of
alienating customers with inflated prices. If demand for the product isn't high
enough, an ill-timed production surge can leave valuable inventory depreciating
in a warehouse, damaging the bottom line. Prudent pricing strategy must take
into account what the market will bear in terms of supply and as well as price.

While increasing sales revenue is beneficial to the bottom line, it serves as a

double-edged sword when it comes to the net margin. Increased revenue leads
to increased profits, but it also means a larger figure at the bottom of net margin
equation. Because the net margin is formula divides net profit by sales, the
benefit of additional revenue is somewhat offset when using this metric. The best
strategy is to focus on increasing sales and decreasing expenses
simultaneously.

Some of the greatest expenses a company incurs come from the day-to-day
running of the business and the production of goods for sale. Operating
expenses can be reduced by relocating headquarters to a cheaper part of town,
leasing smaller factory space or reducing the workforce, but all of these options
can have an important impact on the intangible assets of company, such as
public perception and goodwill. Another way to control costs is to find cheaper
sources for the raw materials needed to manufacture goods. However, if a
company starts producing inferior-quality products to cut expenses, it is likely to
lose many of its customers to competitors.

To reduce the cost of production without sacrificing quality, the best option for
many businesses is expansion. Economy of scale refers to the idea that larger
companies tend to be more profitable. A large business's increased level of
production means that the cost of each item is reduced in a number of ways.
Raw materials purchased in bulk are often discounted by wholesalers. In
addition, higher production levels mean that the costs of advertising, research,
development, depreciation and administration are more spread out. Funding
expansion can be an effective long-term strategy for improving the net margin
because it increases production capacity, drives higher sales volume and
reduces the average cost per item produced.

Read more: What are the best ways for a company to improve its net margin? |
Investopedia http://www.investopedia.com/ask/answers/040215/what-are-best-ways-
company-improve-its-net-margin.asp#ixzz4f96buxJF
Follow us: Investopedia on Facebook

Top 7 Strategies to improve

profit
Making your business more profitable involves looking at ways to increase sales revenue as well as
decreasing your costs and benchmarking your business to see where you can save money.

Here are seven effective strategies to improve profit:

1. Remove Unprofitable Products and Services

The products or services with the highest gross profit margin are the most important to your business.

Once you have identified your most profitable products or services you should concentrate on these. You
will need to determine if the unprofitable products or services should be removed completely or reviewed
for areas of improvement.

2. Find New Customers

New customers can help grow your business. However, this can sometimes be the most expensive
strategy for generating additional revenue. On average it costs eight times the amount of money to acquire
a new customer as it does to retain a current customer.

The simplest (and most cost effective) way to get new customers is to offer incentives to your current
customers and motivate them to initiate referrals for you. Word of mouth is the most powerful form of
advertising.

3. Increase your Conversion Rate

Generating new leads is an important part of business growth. But do you know what percentage of
these leads eventually convert to a sale? Increasing sales conversion in your business is one of the fastest
and lowest cost methods to boost your business profits.

4. Review Current Pricing Structure

Raising prices can be a terrifying prospect; however a small increase in your prices can make a significant
impact on your gross profit.

Therefore, correct costing of your products and services is very important. You should review the costing
of your products regularly and adjust your prices accordingly.

5. Reduce your inventory

Stock control is a good way to streamline your business and improve cash flow.

With less money tied up in slow-moving inventory and fewer losses due to expired or discontinued
inventory. Ordering more frequently allows you to compare prices and take advantage of seasonal
clearance or overstock discounts.

6. Reduce your overall direct costs

Reducing your overall direct costs will have a significant impact on your gross margin.

One way to reduce your direct costs is to negotiate better prices or discounts for everything you
buy. Provided the quality is comparable finding the best prices may require finding a new supplier.
 Another way to reduce your direct costs is to eliminate unnecessary purchases. A thorough review of
your direct costs should highlight any areas where overspending has occurred.

7. Reduce your overheads

For many businesses overhead expenses have a way of creeping up over time. Regular review of your
overhead expenses is a simple and effective way of improving your net profit. Benchmarking your
business to similar businesses in your industry may highlight areas for improvement.

How to Increase Operating Income

by Tara Kimball

Related Articles
1How to Improve Operating Profit Margin
2How to Increase the Net Operating Income Without Increasing Sales
3Reasons for a Decline in Operating Profit
4How to Improve Your Gross Profit
Operating income is your company's earnings before deductions and taxes. All of your business operations,
expenses and sales impact the overall operating income your company earns. Understanding each component that
contributes to the calculation can help you find the best way to improve your financial results. If you evaluate your
business operations, you may be able to find several ways to increase your company's operating income.
Ads by Google

Start Download - PDF Now

Convert Any File to a PDF. Get the Free From Doc to Pdf App!

www.fromdoctopdf.com
Reduce Cost of Goods Sold

Review all of the expenses that relate to your cost of goods sold. These costs can be manufacturing labor, supplies
necessary for the manufacturing process or the direct purchase price of your inventory. Research other suppliers or
explore other contract options with your current supplier to reduce initial expenses. Identify more efficient
manufacturing methods to reduce the salaries associated with your manufacturing operations.

Increase Sales Revenue

Raising your sales revenues can help you increase your operating income. Target your high-margin products,
marking them down or offering specials to sell more of them. If you can increase the number that you sell, you will
make more money, even if you reduce the price. For example, if your company realizes $10 profit on a single sale of
a high-margin item, you can increase the overall revenue by reducing the price by $2 and marketing the sale price.
Selling one product at full price will net you $10, but selling five of them at the sale price can net you $40.

Reduce Labor and Operations Costs

Look at all of your labor costs, including operations and administrative staff. Look for areas where you can reduce
the hours worked to help save in overall payroll costs. Limit overtime hours, consolidate tasks and eliminate
redundant positions. Keep a record of service call payments, administrative fees, office supplies and all other
incidental expenses for your company. Review the transactions in detail to identify areas where you can reduce
costs. Take advantage of any early pay discounts provided by your vendors.

Audit Utilities and Insurance

Have an energy savings review conducted on your property. Ask for a thorough review of your property to reduce
the energy consumption. Use energy-saving bulbs, update the seals around doors and windows, install thermal
windows or light-absorbing film on the glass. There are many options for small, cost-effective upgrades that can cut
your electricity costs significantly. Commercial insurance policies can be costly. Contact your company's insurance
provider about any available premium discounts or coverage changes that may help reduce your insurance
premiums.
Ads by Google

-
To stay profitable and competitive in a crowded business landscape, organizations must
constantly try to maximize earnings and minimize expenses. However, accurately
determining how well organizational assets are being used to generate profits can be a
formidable task.
Thats where profitability ratios come ina group of financial metrics that organizations can
use to become more efficient and profitable. To that end, heres a look at several key
profitability ratios and what organizations can do to improve them.
Gross Margin
How profitable is a company in selling its inventory or merchandise? The gross margin ratio
provides an answer by comparing the gross margin of a company to net sales.
Another way to think of the gross margin ratio is the percentage markup on merchandise
from its costcalculated by dividing gross profit dollars by net sales dollars. For example, a
company with net sales of $600,000 over a given period and a cost of goods sold of
$400,000 would have a gross profit of $200,000 (a figure reached by subtracting the latter
amount from the former). Dividing the gross profit ($200,000) by the net sales ($600,000)
yields a gross margin ratio of 25%. The larger this percentage, the more profitable the
company should be.
Of course, understanding the percentage of profitability in a company is only valuable if an
organization can then use that data to affect positive change. Thankfully, there are a
number of ways to increase the gross margin ratio. For example, building brand value
through effective marketing in order to convince customers to pay more for products, even
while acquisition costs stay the same, can be a very successful approach.
An added benefit of upping the perceived value of a brand is higher customer retention,
which also improves the bottom line.

Most businesses rely on sales to generate revenue. Unfortunately, 67% of all sales people
fall short of reaching their quotas. The development of a more-efficient sales process and a
higher-quality sales force can help organizations increase overall sales effectiveness.
Better internal communications within the sales department is a good start and can be
highly beneficial, as it allows for a more efficient use of time and resources. When
employees and leaders across different levels and departments within the organization
communicate effectively, many potential problems may be averted.
Advanced CRM tools such as the Salesforce's Community Cloud provide a platform for
members of an organizationas well as customers, partners, and othersto form online
communities, and interact, troubleshoot, and gain access to data. In addition to facilitating
clear communication within a company, these CRM tools also help increase customer
satisfaction.
The use of analytics tools to gain a better picture of each step in the sales funnel, as well as
promote B2C and B2B lead generation and qualification, is also a powerful driver of higher
gross margin ratios, as companies that excel at lead nurturing generate 50% more sales
ready leads at 33% lower cost.
Operating Margin
The operating margin ratio takes gross profit margin one step further by factoring in
overheadssuch as selling, administrative expenses, and depreciationalong with the
cost of goods sold. As a result, the operating margin directly reflects the income associated
with the companys core business and operations. Think of it as a measure of the money
flowing into a company from sales, and flowing out for day-to-day expenses.
A high operating margin ratio is a strong indicator that the business is being run efficiently,
which translates into higher profitability overall.

Organizations looking to increase operating margins should focus on finding ways to either
spend less money by reducing operating expenses, or bring in more money by increasing
sales. Owning equipment instead of leasing or renting, cutting out unnecessary expenses,
and possibly downsizing are all proven ways for companies to spend less. However, in the
push to increase operating margins, businesses should be wary of potential dangers of
cutting costs.
Purchased equipment often requires a sizable initial expense, and may result in a company
getting locked into technology that quickly becomes obsolete. Downsizing may result in
lower employee morale among those who retain their jobs. Increasing sales, however, is
doubly beneficial, as more sales bring in more revenue and achieve efficiencies through
economies of scale, which can translate into lower production costs and supplier
discounts.
Profit Margin
Profit margin (or net profit margin) is a ratio that takes a simple and straightforward
approach to evaluating a companys profitability. Along with incorporating all the elements
used to calculate operating margin, profit margin ratio also factors in non-operating income,
interest expense, and income taxes.
While the simplicity of this ratio allows organizations to evaluate how much of every dollar in
sales is actually retained as earnings, the ratio includes expenses and income that arent
directly related to the companys core business (making profit margin more of a second-tier
financial metric). Still, its very useful for companies looking to see how they stack up with
others in their industry. A higher profit margin for a company means its more lucrative and
has a better handle on costs than competitors.
When it comes to finding ways to improve profit margins, the commercial airline industry
serves as a good case study.
Faced with shrinking revenues in a highly competitive arena, JetBlue is taking a cue from its
competitors. In the past, JetBlue hasnt charged passengers to check second bags. But now
the popular carrier is seriously considering it, as other carriers that charge for the first bag
have enjoyed significant increases in revenue. In addition, JetBlue plans on packing more
seats on its planes to increase per-plane profit while all other factors remain the same.
Return on Assets
A companys annual income is derived from business assets in use throughout the year,
including any assets added on during the year. Like ROI, return on assets the ratio of net
income over total assets is a good measure of a managements ability to use corporate
assets to generate profit. The higher a companys return on assets, the more money it can
make with less equipment, inventory, etc.
To improve return on assets, companies need to either increase net income or decrease
total assets. Ways to do that include raising the price of products and services without
dropping demand, boosting sales volume (without increasing asset base) through effective
marketing, better sales force training, a more efficient sales process, and implementing a
lean business modelwhich may include outsourcing non-vital business functions to third
parties.
Given todays competitive business landscape, companies need to raise all contributors to
profitability from levels of sufficiency to efficiency. By focusing on the above key financial
ratios and the concrete ways to achieve greater profitability, such as pricing, reducing waste
and costs, boosting sales volume, and improving customer service and customer retention,
companies stand a much better chance of reaching long-term profitability and sustainability.
-
tep 1: Determine whether the differences between group means
are statistically significant
To determine whether any of the differences between the means are statistically significant,
compare the p-value to your significance level to assess the null hypothesis. The null
hypothesis states that the population means are all equal. Usually, a significance level
(denoted as or alpha) of 0.05 works well. A significance level of 0.05 indicates a 5% risk of
concluding that a difference exists when there is no actual difference.

P-value : The differences between some of the means are statistically significant

If the p-value is less than or equal to the significance level, you reject the null
hypothesis and conclude that not all of population means are equal. Use your
specialized knowledge to determine whether the differences are practically
significant. For more information, go to Statistical and practical significance.

P-value > : The differences between the means are not statistically significant
If the p-value is greater than the significance level, you do not have enough evidence
to reject the null hypothesis that the population means are all equal. Verify that your
test has enough power to detect a difference that is practically significant. For more
information, go to Increase the power of a hypothesis test.

Analysis of Variance

Source DF Adj SS Adj MS F-Value P-Value

Paint 3 281.698 93.8993 6.02 0.0043

Error 20 312.068 15.6034

Total 23 593.766

Key Result: P-Value

In these results, the null hypothesis states that the mean hardness values of 4 different paints are
equal. Because the p-value is 0.0043, which is less than the significance level of 0.05, you can reject
the null hypothesis and conclude that some of the paints have different means.

Statistical and practical significance

Learn more about Minitab
 The difference between a sample statistic and a hypothesized value is statistically significant
if a hypothesis test indicates it is too unlikely to have occurred by chance. To assess
statistical significance, examine the test's p-value. If the p-value is less than a specified
significance level () (usually 0.10, 0.05, or 0.01), you can declare the difference to be
statistically significant and reject the test's null hypothesis.

For example, suppose you want to determine whether the thickness of car windshields is
larger than 4mm, as required by safety rules. You take a sample of windshields and conduct
a 1-sample t-test with an of 0.05 and the following hypotheses:

H0: = 4
H1: > 4
If the test produces a p-value of 0.001, you declare statistical significance and reject the null
hypothesis because the p-value is less than . You conclude in favor of the alternative
hypothesis: that the windshield thickness is greater than 4mm.
But if the p-value equals 0.50, you cannot claim statistical significance. You do not have
enough evidence to claim that the average windshield thickness is larger than 4mm.

A statistically significant result might not be practically

significant
Statistical significance itself doesn't imply that your results have practical consequence. If
you use a test with very high power, you might conclude that a small difference from the
hypothesized value is statistically significant. However, that small difference might be
meaningless to your situation. You should use your specialized knowledge to determine
whether the difference is practically significant.

For example, suppose you are testing whether the population mean () for hours worked at
a manufacturing plant is equal to 8. If is not equal to 8, the power of your test approaches
1 as the sample size increases, and the p-value approaches 0.

With enough observations, even trivial differences between hypothesized and actual
parameter values are likely to become significant. For example, suppose the actual value of
mu is 7 hours, 59 minutes, and 59 seconds. With a large enough sample, you will most likely
reject the null hypothesis that is equal to 8 hours, even though the difference is of no
practical importance.
Confidence intervals (if applicable) are often more useful than hypothesis tests because they
provide a way to assess practical significance in addition to statistical significance. They help
you determine what a parameter value is, instead of what it is not.

-\

Lets start with an example

Im going to use this example to help you understand how to enter the data.
Suppose you want to study the effect of sugar (IV) on memory for words (DV).
You have three groups (also called conditions) in your experiment, sugar, a
little sugar and no sugar. Each participant only participates in one condition of
the experiment. Participants in the first condition are not related in any way to
participants in the second condition or third condition. Because the
participants in each condition are not related in any way, we will use the 1-
Way Between Subjects ANOVA. Here are the data.

Condition 1: Sugar Condition 2: A little Sugar Condition 3: No Sugar

Participant 1 = 3 words Participant 1 = 3 words Participant 1 = 2 words

Participant 2 = 6 words Participant 2 = 5 words Participant 2 = 2 words

Participant 3 = 4 words Participant 3 = 3 words Participant 3 = 1 words

Participant 4 = 3 words Participant 4 = 3 words Participant 4 = 3 words

Participant 5 = 5 words Participant 5 = 4 words Participant 5 = 3 words

What you want to know

In this experiment, you want to know if there is a significant different between

the data collected from each condition, sugar, a little sugar and no sugar. You
want to know if sugar really does have an effect on memory for words. Does
word memory significantly increase or decrease when people eat sugar? Is
there no difference in word memory for sugar and no sugar conditions?
Why not just look at the data?

Just looking at the data, you can probably see that there is a difference in
word memory between the three conditions. You can probably see that word
memory in the sugar condition appears to be much better than word memory
in the no sugar condition. Word Memory in the a little sugar condition also
appears to be better than that in the no sugar condition. People generally
appear to remember more words when they have eaten sugar. So you might
be wondering, why cant I just look at the data? Why do I have to conduct this
t-test? The reason is that we are not just trying to figure out if there is a
difference in words recalled between each group. We want to know if there is
a statistically significant difference. That is, a real difference as defined by
statistics. The ANOVA will be able to tell us that.

Descriptives Box

Take a look at this box. You can see each condition name in left most column.
If you have given your conditions meaningful names, you should know exactly
which conditions these names represent. You can find out the number of
participants, the mean and standard deviation for each condition by reading
across each of the three condition rows. You can also see things like the
minimum and maximum value in each condition, as well as confidence
intervals and standard error.
Example

In this Descriptive Statistics box, the mean for the sugar condition is 4.20. The
mean the mean for the a little sugar condition is 3.60 and the mean for the no
sugar condition is 2.20. The standard deviation for the sugar condition is 1.30,
the standard deviation for the a little sugar condition is 0.89 and the standard
deviation for the no sugar condition is 0.84 (when rounded). The number of
participants in each condition (N) is 5.

Compare the Means

We use ANOVA to determine if the means are statistically different. But you
dont have to use ANOVA to find out some basic information about mean
differences. Compare your means. Which one is the highest? Which is the
lowest? If you were to find significant differences with your ANOVA, what do
these directional differences in the means say about your results? In this
example, the mean for the sugar condition is 4.2 words whereas the mean for
the no sugar condition is 2.2 words remembered. The mean for the A little
Sugar Condition, 3.6, falls in between these two. So just eyeballing it, we can
see that there are more words remembered in the Sugar condition. We need
our ANOVA to determine if the differences between condition means are
significant. We need ANOVA to make a conclusion about whether the IV
(sugar amount) had an effect on the DV (number of words remembered). But
looking at the means can give us a head start in interpretation.

ANOVA Box

This is the next box you will look at. It shows the results of the 1 Way Between
Subjects ANOVA that you conducted. Take a loot at the Sig. value in the last
column.

Sig value

This value will help you determine if your condition means were relatively the
same or if they were significantly different from one another. Put differently,
this value will help you determine if your IV had an effect. In this example, the
Sig. value is 0.027.

If the Sig value is greater than 05

You can conclude that there is no statistically significant difference between

your three conditions. You can conclude that the differences between
condition Means are likely due to chance and not likely due to the IV
manipulation.
If the Sig value is less than or equal to .05

You can conclude that there is a statistically significant difference between

your three conditions. You can conclude that the differences between
condition Means are not likely due to change and are probably due to the IV
manipulation.

Our example

The Sig. value in our example is 0.027. This value is less than .05. Because of
this, we can conclude that there is a statistically significant difference between
the mean number o words remembered for all of our conditions (sugar, a little
sugar, no sugar).

The problem

The Sig value does not tell you which condition means are different. It could
be that only the sugar condition is significantly different than the no sugar
condition in terms of number of words remembered. It could be that only the a
little sugar condition is significantly different than the no sugar condition. It
could be that all conditions are significantly different from each other. The Sig
value can tell us that there is a significant difference between some of the
conditions. It just cannot tell us which ones.

The solution

Researchers have solved this problem by conducting post hoc tests. These
tests are used when he have found statistical significance between conditions
but when we dont know where the significant differences are. These tests are
not used when the results of a 1-Way Between Subjects ANOVA are not
significant because there is no need. But when we do find a statistically
significant result, when the Sig. value is less than .05, we need to use these
tests.

Types of tests to use

When you analyzed your data, you might remember being asked to click on
the Post Hoc button. This button brought up a Post Hoc Multiple Comparisons
box with many options to check. These options represented various post hoc
tests. Most of these tests have strange names (like Bonferroni and Scheffe)
but thats just because they are named after the people who invented them.
You were asked to check two tests, Tukey and Dunnetts T3. You really could
have checked as many as you liked. The Tukey test is popular so we will
focus on that one. If you find a significant result with a 1-Way Between
Subjects ANOVA, and if your IV has 3 levels, you will need to use the results
of a post hoc test like the Tukey test to compare

Condition 1 and Condition 2

Condition 1 and Condition 3

Condition 2 and Condition 3