How to Understand Your Business Operating Ratios

Do you know the information value of operating, liquidity, profitability and leverage ratios?

The most important indicators on a business financial dashboard are operating ratios, also known as asset management ratios.  The ability to turn fixed assets, raw materials and inventory into cash is reflected in various indicators including the inventory turnover, sales-to-assets and accounts receivable ratios. These are top line indicators that reveal the general operating strength of your company.

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These ratios show how much revenue you generate relative to your assets, how quickly you convert assets into sales and how soon those sales are turned into cash.

Inventory Turnover Ratio: Shows how quickly inventory is turned into sales.  A ratio trending higher indicates higher sales volume or better inventory management.

Sales to Assets: An indication of how much sales volume is generated by each dollar of assets used to produce sales.  Generally a higher ratio compared to other companies or time periods means the company is operating with a leaner and more efficient level of assets.

Accounts Receivable Aging:  Simply a reflection of how quickly the company collects payment from its customers after a sale.  The goal should be to move this toward zero days outstanding which would indicate immediate cash payments.

Pay attention to the operating ratios for they are the beating heart of your company.

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About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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One Response to How to Understand Your Business Operating Ratios

  1. Pingback: How Liquid Is Your Business? Know Your Financial Viscosity | Borrowing Money: Your Handy Guide

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