Ratio analysis is a method of computing and interpreting financial ratios to determine organization performance (Drake, 2007). Ratio analysis involves selection of financial data, calculating the required ratio and interpreting the result. In interpreting the results of ratio analysis, already established financial ratios for the industry under which the organization operates in are used benchmark the financial performance of the organization. The main purpose of ratio analysis is to assist in making financial and investment decisions. Internal uses of ratio analysis include evaluation of the performance of the employees, credit policies and the efficiency of operation (Drake, 2007). Externally, ratio analysis assists in evaluating potential investments and the credit-worthiness of borrowers. The financial documents, which include the balance sheet, statement of income, and cash flow, as well other disclosures present in the financial documents provide the necessary information for conducting ratio analysis.
The most valued ratios to managers are liquidity ratio, activity ratio, and profitability ratio (Drake, 2007). The liquidity ratio provides information about the company’s ability to meet short-term debt obligations. It is calculated by dividing current assets by current liabilities. Activity ratio measure the ability of a firm to manage its resources efficiently. In most cases, activity ratio measures the efficiency of a firm’s inventory structure. Computation of activity ratio involves dividing sales with the amount of inventory at hand. Finally, profitability ratio provides information concerning the amount of income for every sale made. Profitability ratio includes gross profit margin and net profit margin. Gross profit margin is the ratio of gross profit (total sales revenue minus cost of sales) to sales while net profit margin is the ratio of net profit (gross profit minus operating expenses) to sales. Net profit margin expresses how much of every dollar of sale remains after all expenses (Drake, 2007).
In 1960s, Douglas McGregor developed two theories, Theory X and Theory Y when he was trying to study the view of management on employees’ working attitudes (Doan, 2011). According to McGregor, Theory X demonstrates that employees tend to work unenthusiastically if the managers do not establish controls. The theory continues to demonstrate that if managers want to see the desired organizational outputs, they must give high rewards to the employees and punish them heavily if they do not meet what is required of them. This theory forms the basis for some theorists to believe that people are untrustworthy and managers need to look over their shoulders. This has led to application of authoritarian management style in many organizations (Doan, 2011). Controls are put in place to ensure that employees work according to the requirement of the organization. Such organizations adopt vertical method of communication, top-bottom method of communication. Management team gives instructions and communicates decisions to employees in form of commands. Employees are just takers in the organization and they just follow orders from above without any objections. However, such organizations experience high employees turnover as many are not able to work is authoritarian atmosphere for a long time.
On the other hand, Theory Y demonstrates self-control in all employees. Management applies participative management style is the organization. This theory forms the foundation of the notion that people are trustworthy and controls are unnecessary and counterproductive. Theory Y maintains, “Every employee will take heart to strive for the best, seeing achievement as a spiritual reward. All energies, initiatives, gray matters are contributed to achieve the objectives, one after another, until the company ultimate goal is reached” (Doan, 2011).
Doan (2011) observes that the two theories are not appropriate for determining personality and working attitudes. Both personality and working attitudes are dependent on the current working environment. For example, in developing nations, a combination of high rewards and directions of Theory X maybe used before Theory Y becomes effective. Theory Y will only be effective if the employees have attained all their hierarchy needs. Therefore, the notion that some people are trustworthy while others are untrustworthy is unfounded. Working attitudes of employees depends on the economic and social environment at a particular time.
In the contemporary business environment, many organizations have adopted automation of their business processes. According to Srivastava (2000), “automation is the use of controlled systems such as computers to control industrial machinery and processes, replacing human operations.” Automation is also a function or a process, which is self-driven and decreases the need of human involvement, and eventually eliminates this need (Srivastava, 2000). Automation has various impacts in the society, some are positive while others are negative. From the positive point of view, automation has led to improvement of the quality of life in the society. Due to office automation, people are able to afford more leisure time where they engage in social and recreational activities, which add value to live (Certo, 2009). In the current times, many people are able to work form their homes through office automation. This has resulted into high productivity, as employees do not waste a lot of time in commuting back and forth their offices. In addition, operational efficiency in the pharmacies has been improved through automation. Patients are able to acquire their drugs without having to wait for the few pharmacists to serve them. All these have contributed to increased wealth of the society as a whole as quality of life increased (Doan, 2010).
Conversely, automation has contributed to increased unemployment rate as machines replace many jobs previously performed by humans. High unemployment rate in the society has led to increased crime rates as the unemployed try to seek other means of earning income. It is feared that in the upcoming years, human workers might be completed hedged out by robots and computers. This will reduce the mass-market purchasing power because people will no longer earn income, which is used to purchase goods and services for domestic use. In the end, the global economy stands to collapse hence making the life of the society miserable (Doan, 2010).
Organizational controls are management processes, which managers put in place to control workflow in their organizations (Weber, 2000). Usually, there are three types of organizational controls, which exist in many organizations. They include feedfoward controls, concurrent controls, and feedback controls. Feedfoward is used in the input stage of a process (Weber, 2000). Managers use it to anticipate problems before they occur. For example, at General Motors, managers use feedfoward control in their supply department. All suppliers of raw materials have rigorous specifications about the quality of materials they supply to the company. The materials should of high quality and should meet all the market standards. The management of General Motors does this to ensure no quality problems are experienced in the products once they are released to the market.
In the conversion process (conversion of inputs into outputs), managers use concurrent controls to gather feedback on how inputs are converted into outputs. This allows managers to correct problems as they occur (Weber, 2000). At General Motors, managers pays close attention to machines used to assemble motors vehicle parts in the assembly line. It is a requirement of all line managers, engineers, and supervisors to check assembling machines before they begin assembling vehicles. The quality control department conduct general audit on all assembling machines on monthly basis to ensure that they are fit for service.
When inputs are converted into outputs, managers make use of feedback controls to gather fact information that can be used in future (Weber, 2000). At General Motors, the research and development department has the responsibility of conducting customer surveys to find out their reactions towards the products. The research and development utilizes the information gathered from the customers concerning the existing product to make improvement in the future products.
Although creativity and innovation might appear similar, there is a difference between the two. According to Theodore Levitt, “creativity is thinking up new things while innovation is doing new things” (The Difference between creativity and Innovation, 2010). This implies that creativity is simply the act of coming up with an original idea; therefore, it does not involve production of something tangible. On the other hand, innovation involves implementing a new idea into practical use. Therefore, the result of innovation is a tangible product or a concept in an organization. Sometimes, creative ideas may turn into innovation. However, creativity cannot result into innovation if the idea/concept is not introduced to innovation. It is also important to note that not all creativity results into innovation. Occasionally, introduction of innovation into creativity results into realization of the creation being unworkable; hence, the new idea is abandoned. A new idea may be born thus making innovation to lead to creativity (The Difference between creativity and Innovation, 2010).
Creativity and innovation can change how an organization runs its operation as well as the volume of production (Certo, 2009). For instance, an organization can develop new concepts of reducing loss of raw materials caused by excessive spillage in the production plant. The concept can be based on collecting the spilled materials and returning them back into the processing machine. The research and development department can then take up the concept and innovate a conveyer belt that is then placed under the processing machine to collect the materials as they spill and returning them back at the inputting point. A good illustration of application of creativity and innovation is the case of Henry Ford. Henry Ford came up with a creative idea of the assembly line for vehicle production. However, he was not able to implement his idea into practical use. A Japanese motor vehicle assembly company took up the idea, perfected by using their innovations, and then implemented it into their motor vehicles assembly line. This led to establishment of Ford Motors.
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