No matter what your business does or the industry you operate in, you probably have assets that help you sell your products or services.
Business assets can include everything from computers to vehicles, property, materials, equipment, and machinery, and they all contribute to your bottom line in one way or another.
While having assets is key to doing business, how effectively you use them is what can really make or break your long-term success. Asset turnover helps you measure just that.
Asset turnover is a measure of how efficiently your business uses its assets to generate sales. Your asset turnover ratio is how much income you earn based on the total assets you have.
Business assets tend to make up a large part of your working capital and ideally should help your business be as productive as possible. That’s why it’s important to keep an eye on how efficiently you’re using them.
As a general rule of thumb, businesses with a high asset turnover ratio tend to operate more efficiently compared to businesses with a lower ratio.
A high asset turnover ratio signals that a business is using its assets efficiently to generate sales. Operations are productive and the business functions like a well-oiled machine.
A low asset turnover ratio indicates that a business isn’t using its assets as efficiently as it could be. Factors that can contribute to a low asset turnover ratio include:
Investors and lenders can also look at your asset turnover ratio to help figure out how well your business is run.
Keep in mind that the average asset turnover ratio tends to be higher for businesses in some industries than in others.
For example, the retail and grocery industries typically have relatively small asset bases but a high sales volume, meaning they have a high average asset turnover ratio. On the other hand, industries with significant assets, such as real estate and utilities, tend to have a low asset turnover rate.
To that end, it’s a good idea to compare your asset turnover ratio with averages for your industry to get the most accurate picture of your business’s performance.
There are two steps to calculate your asset turnover ratio:
To put it another way, the asset turnover formula is:
Total net sales
–------------------------- = Asset turnover ratio
Total average asset value
Example:
Let’s say ABC Company operates in the retail sector, which has an average asset turnover ratio of 2.1. At the end of the financial year, ABC Company had net sales totalling $100,000.
At the beginning of that year, the total value of ABC Company’s assets was $40,000. The business invested a $10,000 piece of equipment during the year, bringing its asset value at the end of the year to $50,000.
To calculate the asset turnover ratio, you first need to work out the average asset value for the year:
40,000 + 50,000 / 2 = 45,000
From there, you can use the formula to work out the asset turnover ratio:
100,000
–-------- = 2.2
45,000
This is slightly higher than the industry average of 2.1, which indicates that the business is using its assets efficiently.
Staying on top of your assets is an essential part of running your business efficiently.
With cloud accounting software like QuickBooks Online, you can easily record and track your business assets and generate customised reports to analyse your performance, all in one smart dashboard.
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