The following points highlight the three main types of inter-firm comparison. The types are: 1. Management Ratios 2. Cost Ratios 3. Technical Data.
Inter-Firm Comparison: Type # 1. Management Ratios:
The management ratios are those which are linked to sales, profits and assets of a business. These ratios are meant to provide management in a nutshell, a comparative picture of its operating performance, financial result, growth, liquidity etc. compared with those of other firms in the industry or trade. These ratios are worked out on the basis of figures supplied by each member.
In the pyramid of ratios the apex ratio is profit related to the capital employed, which takes into account the various factors affecting the business.
The ratios worked out are useful to the management to the extent that the comparison reflects the earning capacity, return on capital employed, earnings on fixed assets, liquidity, growth etc. of the business vis-a-vis others and on the basis of this information, it can act for future improvement.
Inter-Firm Comparison: Type # 2. Cost Ratios:
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Management may not be satisfied with the ratios calculated in (i). They would like to go a step further to make inter-firm comparison more meaningful and to find out how they are doing in relation to others as regards the cost of production. As competition becomes more keen, cost ratios will assume greater importance for the simple reason that cost reduction becomes a compelling necessity.
The members of the Association will, under this type of inter-firm comparison, have to disclose much more information than they will be required to do in case of (i). The advantages of cost ratios comparison will be more marked in the areas where cost reduction is visualised. Following chart will give the main ratios which are to be calculated for this purpose:
Note: Each element of cost could be further broken up and ratios found for each item which goes to make that element of cost.
Inter-Firm Comparison: Type # 3. Technical Data:
This type of comparison will be of special interest to industries working in highly competitive economies. Such comparison will gradually lead to rationalisation of industry.
It is visualised that technical comparison will be in the realm of quality of materials used, their utilisation, process involved, machinery used, and certain other technical aspects of production. Following are the main ratios which are calculated for this purpose:
Note: Where different processes are involved in the manufacturing of a product, ratios could be worked out for each process.