Requisites for inter-firm or intra-firm comparison
The followings are the per-requirements for meaningful and effective inter firm or intra firm comparison.
1. Similarity of Firms or Departments
Similarity means an age, size of business unit or department, character of production, nature of forms of business organization and the market in which the business units or departments are catering should be the same. For example, a newly started company cannot be compared with 10 years old company. Partnership firm cannot be compared with public limited company.
2. Use of Accounting Ratios
Money values are not useful for comparison. Standard accounting ratios are calculated in order to find out the strength and weakness of the business unit. Same type of accounting ratios should be selected for inter firm comparison.
3. Similarity in Accounting Policies
The selected comparing business units should have uniformity in the use of accounting policies regarding valuation of closing stock, method and rate of depreciation, provision of gratuity, purchase policy, sales policy and the like. If not so, the comparison does not give meaningful results.
4. Adjustments for Inflation
Before calculating the ratios, an analyst should consider the inflation. If so, correct reasons may be find out through comparison and follow corrective actions.
Procedure for Inter firm comparison
The following procedure can be adopted for Inter firm Comparison
1. An analyst should collect all the relevant data of the companies which are participating in inter firm comparison.
2. All the information with adequate interpretation of various ratios should be submitted before the every management of the participating companies to determine the efficiency by comparing the performance of other companies.
3. All the efforts are being made by the analyst to highlight upon the weaknesses and reasons why the results vary from one company to another.