15 Mar Business Alchemy Lesson 12–A Word on Ratios and Little Plastic Army Men (Part Two)
So to continue on with our discussion on understanding ratios…
The second question deals with casualties and point of view. This question has two parts, the first being whether we are viewing the battle field from the enemy’s point of view or the good guy’s point of view and the second part being how many of the opponent’s troops each one of the troop members have to kill to wipe them out.
Regardless of who you want to win, the denominator (guy on bottom) always gets the point of view. This is important so that you can understand whether your team is winning or losing the fight. This makes much more sense when you combine it with the second part of the second question.
The second part is: how many of the other side does each man have to kill in order for their side to win? So here is an example. We have already decided that the assets is our team and liabilities is the bad guy, so we will continue to use them. Say we are looking at a ratio with these two opposing forces and the assets is on top and the liabilities is on bottom. First, we must realize that we are looking at this fight from the liabilities’ point of view. Second, if there are two assets and only one of the liabilities, then we can say (by solving the equation 2/1) that each liability must kill two assets in order to win the battle.
We can summarize this by going over what we know. We know we want the assets to win. We know we are looking at this battle (ratio) from the liabilities side of the fight and we know that each of the liabilities must kill two assets in order for them to win. Sounds like an advantage to the assets, right? That would be exactly right. The ratio here is two and it is a positive result for the company to have a ratio of two. We won!
We can manipulate these results by switching the numbers so there are two liabilities and only one asset or by putting the assets on bottom and the liabilities on top. Each time, we can go through what we know and determine what the ratio means to us.
Remember to keep this in mind when trying to collect information about your business and using ratios to help you make decisions. We will go into more detail about specific ratios in the following posts, but this will always be the foundation for understanding the ratios. As always remember…
Your business THRIVES on a solid FOUNDATION!!!