(b) If the entity being analysed were a not-for-profit entity then there would understandably be much less emphasis on profitability within the analysis. A not-for-profit entity does not have the main financial aim of achieving a particular level of profit or return on capital but instead its aim will be to achieve value for money. There would also be less emphasis on gearing and of course no dividends to consider.
Value for money is achieved by a combination of economy, efficiency and effectiveness. It would therefore be these three factors that would be analysed by the use of appropriate ratios.
Effectiveness is a measure of the success of the entity in achieving its objectives or providing its services. This may well be measured by some non-financial ratio such as the time it takes for outpatients to be treated in a hospital. Efficiency is a measure of how well the entity uses its resources and efficiency measures may take the form of inventory, receivables or payables days but may also be in the form of non-financial ratios such as the doctor to patient ratio in a hospital.
Economy is about keeping the cost of inputs low which may involve factors such as profit margins but may also include non-financial ratios such as the ward time of nurses as opposed to more expensive doctors in a hospital. |
