Asset turnover is a ratio that helps your small business measure the efficiency with which your company converts assets into sales. Figure this ratio by dividing your business’s net sales by your total or average assets. If you have a high asset turnover ratio, you operate more efficiently than competitors with a lower asset turnover.
An Example of Asset Turnover
For example, say your company begins November with assets totaling $100,000. You end the month with assets of $110,000. This means your average assets are $105,000 for November. Also in November, you generated $300,000 in sales with customer returns totaling $15,000. Your net sales come to $285,000.
To figure the asset turnover ratio, take $285,000 and divide it by $105,000, or 285,000/105,000. The ratio comes to 2.71. This means that your business turned $1 of your assets into $2.71 in net sales during November.
The Formula for Asset Turnover
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
You can figure this ratio for a week, month, quarter, or year, depending on your needs.
How Asset Turnover Affects Your Business
When you try to determine how well your business performs, knowing the asset ratio can help you tweak production of your products or services. If your asset turnover lowers from one month to the next, you might examine your production methods, sales figures, or inventory management to see what’s happening. You may have to change your pricing, how you make your product, or how your employees work to get your product to market. You can also compare your asset turnover ratio to companies within your industry to see how you stack up with other businesses.
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