financialtreat – will explain about Complete Explanation of Asset Management Ratios, Must Read! which you will find in the following article. let’s look at this article carefully!
In running a business, there are many ratios used, one of which is asset management ratios. This is to ensure that financial planning and business realization can run optimally. To see the ability of a company in asset management, a financial ratio is needed, one way is to use the activity ratio.
Activity ratio has other terms, namely asset management ratios, solvency ratio, utility ratio (utilization ratio), and turnover ratio (turnover ratio).
Full Explanation of Asset Management Ratios, Must Read!
Basically, the main financial ratios are divided into five types, namely:
- Leverage Ratio
- Profitability Ratio
- Market Value Ratio
- Liquidity Ratio
- Activity Ratio
The function of the five financial ratios above is to take strategic decisions.
The activity ratio can also be said to be one ratio that compares the level of sales and investment in all assets owned by the company. This activity ratio analysis is needed by a goods or services company to assess the efficiency of a company in utilizing its assets.
Well, thus the financial accounting function can run smoothly. Then how important is the analysis of the activity ratio necessary? Before going there, let’s first understand what is activity ratio analysis?
In a company or sales business and various elements of assets must be balanced. For example, examples of fixed asset inventory and other assets. Assets or assets that are not utilized optimally at a certain level of sales result in the funds stopped in these assets getting bigger.
Even though the funds will be more useful or can be used in other more productive assets. Accounting as an information system in this case can maximize its function.
Understanding activity ratio according to experts
So, what do experts think about the activity ratio? Here are some of them.
Activity ratio is the ability of an enterprise to make the most of resources by comparing sales with total assets.
Khikmawati and Agustina (2015)
Activity ratio is a ratio used to measure the company’s ability to manage all assets owned by the company so that it can provide cash inflows for the company
Types of Activity Ratio Analysis
If your company wants to make an analysis of the ratio of activities, first get acquainted with the types of activity ratios known in the world of accounting.
Total Asset Turn Over Or Asset Turnover
Asset turnover is a comparison between sales and the company’s total assets in a certain period of time, it can be one month or three months. The total asset turn over also noted that the level of efficiency of using the company’s overall assets in generating certain sales volumes was the same or in accordance with the company’s reports. Of course, the period or period is the same.
Total assets turn over is also measured by sales volume. The larger the ratio, it indicates that the company’s operations are getting better. Why is that? Because the turnover of assets is faster so that it produces faster profits.
It also indicates that the use of assets in a company is also increasingly optimal. A high ratio can also mean that the number of assets owned has the potential to increase sales volume. This asset turnover is important for the company and must be known by creditors, company owners, and management.
If you want to know the efficiency of using all company assets, here is the formula:
Total Assets Turn Over = Sales / Total Assets x 100%
Working Capital Turnover Ratio
The second ratio analysis is the ratio of the turnover of working capital. In this ratio you compare sales with the net capital of a company. Well, working capital is seen from current assets minus current debt. This ratio measures more on business activities than current assets on current liabilities. The nominal total sales obtained by the company will be seen in this ratio.
This capital turnover ratio can also be said to be a benchmark for working capital ability in one period of the cash cycle in a company. Well, this ratio is considered to be able to influence the recording of financial transactions.
The working capital of a business or company can be said to be effectively based, if the capital does not stop. This means that it is used for business operations. The period of turnover of working capital starts from the cash invested in the working capital part until it returns to cash.
The shorter the capital turnover period, the faster the capital rotates and can be used for the benefit of other companies.
Here is the formula:
Working Capital Turnover =Sales/ Net Working Capital or Sales / Current Assets – Current Debt
Fixed Asset Turnover Ratio
This ratio is to compare sales with fixed assets of an enterprise. This is to measure the effectiveness of the use of existing budgets or funds on fixed assets. This ratio also serves to evaluate the ability of a business or company to utilize its assets more effectively.
All income will increase and enter into the financial statements. This is also a benchmark, if the turnover is slow, the capacity will be greater, and assets will remain less effective.
The following is a formula for calculating the turnover of fixed assets:
Fixed Asset Turnover = Sales / Fixed Assets x 100%
Activity Ratio function
The analysis of the ratio of the activity of an enterprise is certainly made not without reason. An enterprise that wants to develop and even advance is obliged to have an analysis of the ratio of activities. Then what are the functions of the activity ratio?
An analysis of the ratio of activities is made in order to find out the time it takes for an enterprise in one accounting period. In addition, it also measures the effectiveness of the company’s work in collecting receivables.
The activity ratio analysis function is also to measure the estimated time required for the collection of receivables in one accounting period. A company must have a stock of goods. Well, the analysis of the ratio of activities serves to monitor the existing stock of goods in the enterprise.
After that, compare with the company’s pre-made targets. The amount of the company’s capital turnover can also be seen from the analysis of the activity ratio. The owner of the company can also compare it with the results obtained in each rotated capital.
There is an analysis of the ratio of activities, the company can also find out the capital turnover that exists in each financial period. So that the existing capital is more effectively and efficiently used. If there is less effective capital, of course, it can be maximized again.
Activity ratio analysis can also be used to compare the use of company assets and sales in one accounting period.
Activity Rate objective
A company has several goals to be achieved using activity ratios, including:
- To calculate the duration of the company in collecting receivables to creditors for one period.
- To calculate the average day of debt collection (day of receivable).
- To calculate the average few days of inventory of goods stored in the warehouse.
- To measure how much working capital rotates in one period.
- To measure the turnover of fixed assets in one period.
- To measure the company’s assets in sales.
Benefits of Using Activity Rate on Business
The activity ratio has several benefits for businesses including:
- Helps to compare business development in the same line of operation.
- Problem identification can be done using the correct ratio, and allowing you to make the necessary corrections in running a business can be made.
- Simplifies analysis by providing financial data in a simple format, which ultimately helps in decision making.
- Investors can rely on the information provided by the Activity Ratio as it is based on accurate figures and data.
Read more financial management:
The Importance of Understanding Activity Ratios in Business
Basically, this type of activity ratio is a ratio used to assess the speed at which a business converts assets into cash. The ratio can also be an indicator of how well the business has been run.
Therefore, an understanding of this activity ratio is important for companies to have so that their business activities run smoothly. The asset management ratio measures how effectively a company manages its assets.
The asset management ratio in some literature is also called the activity ratio. The company’s operating activities require investments, both for assets that are TIE = EBIT FCC interest expense = NRE + interest costs + lease obligations Interest expense + short-term and long-term lease obligations.
Activity ratio describes the relationship between the company’s level of operations (sales) and the assets needed to support the company’s operating activities. The activity ratio can also be used to predict the capital a company needs both for the short and long term.
That’s an explanation of the asset management ratio. Hopefully, the information above can add knowledge and hopefully useful!