asset turnover ratio

How Efficiently is Your Business Using its Assets to Create Profit?

One way of assessing how well a business is performing is by analyzing asset turnover ratios. These ratios show how effectively the business’ assets are being used to create profits. Also known as asset utilization or management ratios, asset turnover ratios are of particular interest to shareholders and are useful for business owners wanting to improve performance.

Receivables Turnover

This ratio is used to give managers an idea of how fast the business collects its accounts receivables from its debtors. It uses the total year’s credit sales as a ratio to the value of accounts receivable at year’s end. It can sometimes also be calculated as the number of days in the average collection period. The lower the Receivables Turnover and the higher the average collection period, the longer the business is taking to collect debts back from their accounts receivable. This has repercussions on cash flow and can indicate a weak accounts receivable process.

Receivables Turnover:

Credit Sales in a year

Accounts Receivable at year’s end

Average Collection Period:

Accounts Receivable at year’s end

Annual Credit Sales / 365 days

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay their invoices, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

 Inventory Turnover

A slightly more complicated ratio is the Inventory Turnover ratio, which is used to analyze how fast a business’ inventory is sold. It can be expressed in dollar figures, or like Receivables Turnover, in number of days. The lower the Inventory Turnover and the higher the number of days, the longer your inventory is sitting on your shelves, not contributing to sales. There is also the added risk of obsolescence associated with a low inventory turnover. It may be difficult to sell out-dated inventory, a risk especially relevant for those dealing in time sensitive goods such as produce, information technology gadgets and fashion.

Inventory Turnover:

Total Cost of Goods Sold

Average Inventory

Note: The Average Inventory is calculated as Opening Inventory + Closing Inventory, divided by two.

Inventory Period:

Average Inventory

Total Cost of Goods Sold / 365

The Bottom Line

Business analysts use financial ratios to assess the financial performance and position of various businesses. You can use this this financial ratio as well as others to determine how efficiently your business is using its assets to create profit.

About Universal Funding

Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.