Accounts Receivable and Accounts Payable Efficiency Ratios

A valuable way to measure a company’s efficiency is by measuring handling of operating assets like Inventory and Accounts Receivable.  A firm is more profitable if they can have less of their money sitting in warehouses or shelves, not to mention in debtors pockets.

Here are a couple of ways to measure your success at managing your current assets:

1.  How fast is your operating cycle?

Operating cycle = Number of days (in sales $) of your inventory account and A/R account.

 Operating Cycle goals are industry specific and should be measured against your peers.  If you feel your cycle is high then you should dig deeper into inventory ratios and A/R ratios like these:

2. Inventory Turnover Ratio = COGS / Average Op Cycle Inventory.

(Beginning of period inventory + EOP Inventory) / 2 will suffice for an average.

3. Accounts Receivable Turnover Ratio = Net Credit Sales / Average Op Cycle A/R

Once this analysis is complete then you would examine options to improve these ratios and conduct a cost-benefit analysis to determine if any of the solutions would be feasible for your business.

If any of this sounds like something your business should look at and you would like some assistance, please dont hesistate to ask using our contact form.  There is no obligation.