Activity Ratios: How Efficiently Is Your Business Using Its Assets?

What activity ratios tell you

They show how well you manage inventory, collect from customers and use equipment. Low turnover means cash is stuck somewhere.

Profit margins show what you keep from each sale. Activity ratios show how often you repeat the sale with the same assets. A shop that turns its stock eight times a year needs far less cash tied up than one that turns it twice.

Inventory turnover

Inventory turnover = cost of goods sold divided by average inventory. Dividing 365 by the result gives days to sell inventory.

Illustrative example: cost of goods sold is $240,000 and average inventory is $40,000. Turnover is 6. Days to sell are about 61.

A higher number means stock moves quickly. A very high number can also mean you run out of product. Read more in the inventory turnover ratio guide and how to calculate cost of goods sold.

Accounts receivable turnover

Receivables turnover = net credit sales divided by average accounts receivable. It shows how fast customers pay.

Illustrative example: credit sales of $600,000 and average receivables of $75,000 give a turnover of 8. Dividing 365 by 8 gives about 46 days to collect. If your terms are net 30, that gap shows customers are paying late.

Improve it with prompt invoicing and firm follow-up. See sample invoicing emails.

Accounts payable turnover

Payables turnover = cost of goods sold (or purchases) divided by average accounts payable. It shows how quickly you pay suppliers.

A lower turnover means you take longer to pay, which keeps cash in the business longer. Pay too slowly, though, and you risk fees or lost supplier goodwill. Compare your payable days with your collection days. See accounts payable.

Total asset turnover

Asset turnover = net sales divided by average total assets. It shows how many dollars of sales each dollar of assets produces.

Illustrative example: sales of $900,000 and average total assets of $300,000 give a turnover of 3. Capital-heavy businesses, like manufacturers, usually have lower asset turnover than service firms. Compare with your own history and with similar businesses, not with a universal figure.

Using the ratios to free up cash

Shortening the time cash sits in inventory and receivables releases working capital without borrowing.

If you cut receivable days from 46 to 36 on $600,000 of annual credit sales, you release roughly $16,000 of cash (10 days of sales). Reducing slow-moving stock frees more. See cash flow management for related tactics.

Reading the ratios together

No single ratio is enough. Look at inventory days, collection days and payable days together to see the cash conversion picture.

The cash conversion cycle combines the three: days to sell inventory plus days to collect receivables minus days to pay suppliers. In this illustrative example, 61 days of inventory plus 46 days of collections minus 30 days of payables equals 77 days. That is how long your cash is tied up between paying for goods and getting paid for them.

Cutting any of the three shortens the cycle. Shortening it by 10 days on a business with $600,000 of annual sales frees roughly $16,000 of working capital.

When efficiency is not enough

If you have tightened operations and still need cash for growth or timing gaps, funding can bridge it when the payback is clear.

For ongoing swings, a business line of credit fits. For a single purchase such as bulk inventory, working capital may fit. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, and shows true cost and payback before you sign.