A number of ratios exist that can:

• Help a company assess its efficiency of operations
• Allow for Comparison between:
• Other Companies
• Other periods of time, and
• Measure efficient handling of receivables and inventory.

 

 

These are the following:

Average Receivables Ratio/Receivable turnover Ratio

To maximize profits and operate efficiently, early collection of receivables is a must, and is shown by the Receivables Turnover Ratio:

 

Receivables Turnover Ratio =	Credit Sales
	Average Receivables Balance

Where,

Average Receivables =	Receivables Year Start+Year End
	2

                                   

Days Sales in Receivables =	365
	Receivables Turnover

         

 

Days sales in receivables are the average age of receivables, or how long it takes to collect them.

 

We could directly compare the turnover to:

• Other companies or,
• Own company, in prior years.

 

Suppose “Days sales in receivables” is 32 days, is it a good figure, when we compare with other companies, or with the industry average? If industry average is 40, it is fine. But if industry average is 20 days, we need to accelerate our own collections.

 

Inventory Ratios

Inventory held too long can:

• Result in spoilage/warehousing costs.
• Waste money due to interest costs/opportunity costs (i.e. interest which could have been earned by investing the money elsewhere).

 

Inventory turnover is calculated to ascertain this aspect, preferably separately for:

• Raw materials
• Semi-finished goods (goods in process)
• Finished goods.

Ratios thus revealed should be analyzed keeping in mind seasonal considerations, shortages and peculiarities of each industry:

 

Inventory Turnover Ratio

 

Inventory Turnover Ratio =	Cost of Goods Sold
	Average Inventory Balance

Days sales in Inventory =	365
	Inventory Turnover