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Cash flow

What Is an Asset Turnover Ratio?

As a small business owner, you’re always looking for new ways to make money. Are you using your assets and resources to increase sales? Determining your asset turnover ratio shows you if you’re taking advantage of all the possibilities.

What Is an Asset Turnover Ratio?

The asset turnover ratio is a financial metric you can use to see how well your company is using its resources to make money. This information can help you make plans for the future and utilize all of your resources. Combine this information with other metrics to make good business decisions.

How Do You Calculate Your Company’s Asset Turnover Ratio?

The general formula for asset turnover looks like this:

  • Net sales / Average assets = Asset turnover

More specifically, it looks like this:

  • Sales for the stated time period – Customer returns and discounts / (Assets at the beginning of the time period + Assets at the end of the time period) / 2 = Asset turnover ratio

For example, if you had $150,000 in total revenue last year with an average total asset balance of $50,000, your asset turnover ratio would be 3. This also means for every $1 of assets you own, you make $3 of revenue.

You can figure this ratio for a week, month, quarter, or year, depending on your needs.

Why Your Asset Turnover Ratio Matters

You can use your asset turnover rate to understand how well you’re using your assets to make money. If you have a high asset turnover, you’re deploying your assets well and efficiently using what you own to run your business.

Low asset turnover may result from slow sales. It may also mean you have a lot of assets and not enough of a market share to make sales. Your asset turnover ratio is most useful when compared to other asset turnover ratios.

Compare your calculation from one period to the next to see in what direction your company is going. You can also compare your asset turnover to competitors to see how your business stacks up against other businesses.

Finally, use benchmarking data provided by the Government of Canada to understand more about your performance. Any way you use it, your asset turnover ratio is a helpful method for checking your company’s efficiency. Compare your total revenue to total assets to see how well you’re using your resources.

Using accounting software makes it easy to keep track of your total sales to help you calculate your asset turnover ratio, and it also helps you better manage your cash flow. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.

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