Improving Assets Turnover Ratio: A Strategic Approach

The assets turnover ratio measures the effectiveness of a company in generating sales using its total assets, while the fixed assets turnover ratio examines the impact of fixed assets on revenue. The advantages of the assets turnover ratio include considering all assets, providing useful information for evaluating future performance and making strategic decisions. However, it has limitations such as being industry-specific, including idle assets, and providing inaccurate results if not adjusted for changes in asset utilization. Overall, the assets turnover ratio is a significant tool for managers to assess their company's effectiveness in using its assets to generate sales.

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ASSETS TURNOVER
August 12th, 2019
INTRODUCTION TO ASSETS TURNOVER
The concept such as assets turnover ratio is also called by the name of total assets
turnover ratio. In this regard, it can be said that it is the type of ratio that basically measures the
efficiency of the company in relation to the assets that it is using for the purpose to generate
revenue. In simple words, it can also be said that assets turnover ratio is being called as the
efficiency ratio that examines the ability of the company in the task of generating sales by
making best use of firm’s assets.
In terms of financial accounting, assets are a valuable thing or the person that help the
firm in the task of accomplishing the tactical goals and objectives of the corporation. The assets
are of two types such as current and non-current. The list of current assets includes marketable
securities, inventory, prepaid expenses, account receivables, and cash equivalent. On the other
hand, non-current assets are further classified into two categories such as tangible fixed assets
and intangible fixed assets. The tangible fixed assets include buildings, furniture, and equipment
etc. Similarly, intangible fixed assets include copyrights and trademarks, etc.
Thus, in the respective section detail description will be given regarding the concept such
as assets turnover ratio. Here, the discussion will also be carried out in relation to the ways
with the help of which assets turnover ratio can be improved in an effectual manner. The
discussion will also be carried out about the main advantages and limitations that are associated
with the concept of assets turnover ratio in an effectual way.
HOW TO CALCULATE ASSETS TURNOVER
Before getting into more details about the assets turnover ratio, it is very much
important for the individual that it should gain the idea about the manner with the help of which
assets turnover ratio can be calculated. The formula for the same is given below:
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Here,
Total sales: It is basically the annual sales of the company
Beginning assets: It is the type of assets which is identified at the start of the year
Ending assets: It is being considered as the type of assets which is being assessed at the end of
the year.
Thus, in terms of words assets turnover ratio can be obtained when total sales or the
revenue of the company is being divided with an average of total assets. The formula of the
assets turnover ratio can be effectively explained with the help of the below-given example.
Suppose, the company XYZ garment ltd had a total revenue of around 10 million dollars
at the end of its fiscal year. At the beginning of the fiscal year, recorded total assets were 3
billion dollars. On the other hand, at the end of the year recorded assets were 5 billion dollars.
Herein, at first we need to assess the average of total assets and this will be calculated in the
following way:
3+5/2= 4 billion dollar
Thus, the assets turnover ratio of the cited company is 2.5 billion dollars (10/4).
Apart from this, ABC limited is another garment company that is also working in the
same industry. In accordance with the given context, it is assessed that the total revenue of the
respective company in the same fiscal year is 8 billion dollars. On the other hand, at the
beginning of the year, total assets were 1 billion dollars and at the end of the year, total assets
were 2 billion dollars. Thus, the average of total assets will be (1+2)/ 2= 2 or 1.5 billion dollars.
Thus, the assets turnover ratio will be 5.33 (8/1.5)
On comparing the ratio of both companies, it can be said that ABC limited is more
efficient in terms of using its assets for the purpose to generate revenue for the company as
compared to XYZ limited. This is because; in assets turnover ratio interpretation basically
depends on the higher assets turnover ratio. Here, if the assets turnover ratio of the company
is high then in this situation it can be depicted that the firm is working very well in the market.
WHY IT IS IMPORTANT TO IMPROVE ASSETS TURNOVER RATIO
For the firm, it is very much important that they should make efforts in terms of making
improvement in their assets turnover ratio in an effectual way. The main aim of the given ratio
is to assess the efficiency of the company in the process of managing its resources for the
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purpose to generate sales. From the given thing, it is very right to say that if the assets turnover
ratio is high then the given thing will entail better state of the company. In addition to this, the
respective ratio will basically give insight to the investors and creditors of the company into a
different type of internal matters. On the other hand, if the assets turnover ratio then the
respective thing will depict about the bad inventory management and ineffective control
practices of the company. Thus, it is due to the given reason only for the manager of the
enterprise it is very much essential that it should make an effort in terms of improving its assets
turnover ratio in an effectual manner.
WAYS TO IMPROVE ASSETS TURNOVER RATIO
Till now we have made a discussion that how important an assets turnover ratio, for the
company is. Thus, it is very much important for the manager of an organization that he should
put significant efforts in the task of improving the assets turnover ratio. This is due to the
reason that if no proper steps are being taken in relation to the same then in this situation it will
become very much difficult for the company with regard to maintain its competitive position in
the market. Hence, it is due to the presence of the given aspect there are some ways examined
that can be used in order to improve assets turnover ratio of the company. These are all detailed
below:
 Increasing revenue: It is being considered as one of the types of approach with the help
of which assets turnover ratio of the firm can be improved. Further, it is also being
regarded as one of the easiest ways. This is because, there are many situations in which
the firm utilizes its assets very well, but due to sales a firm is not able to improve its
assets turnover ratio. In this situation, it is essential for the company that it should
improve its sales. This can be done by making the promotion of the company’s products
and services.
 Liquidate the assets: Another most effective way with the help of which assets
turnover ratio of the company can be improved is liquidate the assets. The effort
should be made by the manager in terms of quickly liquidating the unused and obsolete
assets. The manager should prepare the list of assets that are not utilized very frequently.
Further, the firm should sell all those assets that do not add on to the bottom line
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regularly in an effectual manner. It is through this way an only organization can
improve its assets turnover ratio.
 Leasing: The assets turnover ratio can also be enhanced with the help of concept such
as leasing. It is required by the firm that instead of buying any equipment it should lease
them. This is due to the fact that lease assets will not be counted under the list of fixed
assets. Here, it is by complying with the given type of activity the company can save its
money and the money saved from the given activity can be used for some other useful
purpose in the firm in an effectual manner.
 Improving efficiency: The ineffective or the low efficiency of the company can also be
regarded as another significant reason behind the low assets turnover ratio. Thus, it is
due to the presence of a given aspect effort should be made by the corporation in terms
of improving the overall efficiency of the company. However, with an aim to do the
same the manager of the firm need to collect different types of information such as how
the firm is using assets and how it is improving its productivity with the help of assets.
This will help in improving the output of the company without making many
adjustments in the expenses of the firm.
 Better inventory management: It is important for the management that it should always
check its inventory. Here, it should basically check the total time spent in the movement
of the goods. If the delivery system of the product will be low, this means that the firm
is not delivering the product to buyers within a specified time, this will mean there will
be a delay in getting payment also. Thus, the firm should work on the given aspect with
an aim to improve the assets turnover ratio of the company in an effectual way.
 To accelerate the account receivables: The assets turnover ratio of the company can
also be improved if efforts are being made in the process of increasing the account
receivables in an effectual way. In accordance with the given context, it can be said that
if the firm will face the situation like a slow collection of the accounts receivables then
in this situation the overall sale of the company will also be slow. As a result of this
impact of the same will be seen on the assets turnover ratio. But, the given thing can
be improved if the manager of the organization will put the focus on the collection
practices of the company. In this regard, the firm can hire some employees whose main
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responsibility will be to get the collection for the enterprise. It is through such type of
practices only assets turnover ratio can be improved.
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DIFFERENCE BETWEEN ASSETS TURNOVER AND FIXED
TURNOVER RATIO
Now, it is very much important for the individual that it should improve its understanding
of the difference that exists between both assets turnover and fixed assets turnover ratio. Hence,
the detail about the same is given below:
Assets turnover ratio Fixed turnover ratio
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The given turnover ratio basically measures the
effectiveness of the company in the process of
generating its sales with the help of its assets.
This ratio gives a description that how a
company is effective in the process of
generating sales by using its fixed assets.
In the assets turnover ratio, the impact of
total assets of the company is being examined
on the overall sales of the firm in an effectual
way.
Here, the manager of the firm is more
interested in the task of assessing the effect of
fixed assets of the company on the overall
sales.
ADVANTAGES OF ASSETS TURNOVER RATIO
Till now we have made very much discussion about assets turnover ratio, now it’s time
to reveal about the benefits that are related to the assets turnover ratio. By using the respective
information manager of the firm can assess the effectiveness of the given ratio in the company.
The explanation in relation to the same is given below:
 It gives consideration to all the assets: The very first benefit that is related to assets
turnover ratio is that it gives consideration to all the assets of the organization. Unlike
the fixed turnover ratio which only examines the impact of fixed assets on the revenue
of firm, assets turnover ratio, examines the impact of all the assets of the firm on the
overall activity of an enterprise. Thus, it is through this way only the right kind of
decision will be taken by the manager whether its assets are playing an important role in
raising the effectiveness of the company or not.
 It is very much useful for the company that is more interested to see whether it is
generating revenue in proportionate with the assets. Thus, with the use of the assets
turnover ratio, companies are able to tell that whether the activity which they are
performing is helping in compensating the cost which they have incurred on the task of
purchasing assets or not. It is through this way only the manager of the firm can also
evaluate the future performance of the assets. Thus, the given ratio will also guide the
firm in the task of making the right decision.
 It makes the comparison very much easy for the investors: It is with the help of the
given ratio only investors can determine whether its fixed assets are incrementing or
discriminating. On the other hand, it is with the help of the given ratio only investors
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can also determine that when the reinvestment can be made in the assets. Overall, it is
very right to say that by taking help from the assets turnover ratio, manager of the firm
can take various types of strategic decisions which will have a significant impact on the
overall activity of the corporation in an effectual manner.
LIMITATION OF ASSETS TURNOVER RATIO
After a discussion about the advantages, it is also essential for a manager that it should
also get the idea about the limitation that is related to a given ratio.
 Industry related limitation: It is basically used for the companies that are being involved
in the manufacturing operation. For example, for the industries that are heavily based on
the services sector is not able to use the respective form of assets.
 It is inclusive of the idle assets: The computation process of the total turnover ratio that
does exclude that specific type of assets that are not being employed in the production
process as well as in the period in which turnover was being generated. Hence, the given
thing will indicate that there are chances that the assets turnover ratio could provide
inaccurate results. This is due to the fact that here idle assets were exhaustively being
used in the same. On the other hand, if in any reason idle assets will be involved in the
production process of company then in this situation the net turnover of the company
will be changed. Thus, due to this the assets turnover ratio will also be changed in an
effectual way. Hence, it is very right to say that these are some main limitations that are
related to assets turnover ratio.
CONCLUSION
From the conducted analysis, it can be concluded that assets turnover ratio has the
significance in today’s scenario. This is because; the main aim of any company is to improve the
overall sales of the company. Thus, by using the given tool the manager of the firm can get the
idea that whether its assets are working very well as per the standard or not. It is by complying
with a given type of activity the only manager can take the decision in relation to the assets in an
effectual way. This will have a positive impact on the overall operation of the firm.
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