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Operational Efficiency Lesson

Operational efficiency measures how well a company utilizes its assets to generate sales. It is measured using turnover ratios that calculate the number of times assets are turned into sales over a period. The key ratios discussed are asset turnover, fixed asset turnover, inventory turnover, and accounts receivable turnover, which help evaluate how efficiently a company uses its assets, fixed assets, manages inventory levels, and collects payments from customers.

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Ronna Mae Redubla
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295 views3 pages

Operational Efficiency Lesson

Operational efficiency measures how well a company utilizes its assets to generate sales. It is measured using turnover ratios that calculate the number of times assets are turned into sales over a period. The key ratios discussed are asset turnover, fixed asset turnover, inventory turnover, and accounts receivable turnover, which help evaluate how efficiently a company uses its assets, fixed assets, manages inventory levels, and collects payments from customers.

Uploaded by

Ronna Mae Redubla
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Operational Efficiency – measures the ability of the company to utilize its assets.

Assets are generally acquired for the purpose of


generating sales. Operational efficiency is measured based on the company’s ability to generate sales from the utilization of its assets, as a
whole or individually. The turnover ratios are primarily used to measure operational efficiency. Ratios for measuring operational efficiency
are:
1. Asset Turnover – Asset turnover ratio is an indicator of the efficiency with which the company is utilizing all of its assets. It measures
the peso value of sales generated for every peso of the company’s assets. The higher the turnover rate, the more efficient the company is in
using its assets.
Name of Ratio Formula
Net Sales
Asset Turnover
Average Asset

Name of Ratio Formula


Net Sales
Average Asset
Asset Turnover Example:
5,385.86
= 8,532.92 = 0.65x
Observe that turnover ratios are expressed as “number of times”. The asset turnover in the example is 0.65x which reads as “zero point
sixty-four times”. This means that sales generated was 0.65 times of average assets.
2. Fixed Asset Turnover – this ratio is similar to asset turnover, except that it is focused on fixed assets only. Fixed asset is composed of
property, plant and equipment. It is an indicator of the efficiency of fixed assets in generating sales.
Name of Ratio Formula
Net Sales
Fixed asset turnover
Average Fixed Asset

Name of Ratio Formula


Net Sales
Average Fixed Asset
Fixed asset turnover Example:
5,385.86
= 5,706.10 = 0.94x
3. Inventory turnover – is measured based on cost of goods sold and not sales. This is because inventory, upon sale is transferred to cost of
goods sold. It makes both the numerator and denominator measured at cost. This ratio is an indicator of how fast the company can sell its
inventory.
Name of Ratio Formula
Cost of Goods Sold
Inventory turnover
Average Inventory

Name of Ratio Formula


Cost of Goods Sold
Average Inventory
Inventory turnover Example:
1,374.79
= 604.27 = 2.28x
4. Days in Inventory – this ratio computes the average number of days that inventories are held until sold. Days in inventory can be easily
derived from inventory turnover by multiplying 365 days by/Inventory Turnover. We can also compute days in inventory as follows:
Average Inventory
Average Daily Costs of Goods Sold
Where:
Average Inventory = Asset beginning + Asset ending
2
Average Daily Cost of Goods Sold = Cost of Goods Sold
365
Name of Ratio Formula
365
Days in Inventory
Inventory Turnover
Name of Ratio Formula
365
Inventory Turnover
Days in Inventory Example:
365
= 2.28 = 160.09x
5. Accounts Receivable Turnover/Days in Receivable – measures the number of times the company can convert accounts receivable to
cash during the year. Basically, the ratio asks how many times the company was able to collect on its average accounts receivable during
the year.
Another measure of the company’s collection effectiveness is days in receivables. It can be computed from the turnover ratio or
computed on its own. Days in receivable is a more visual indicator as compared to accounts receivable turnover. It computes for the
average number of days from date of sale to date of collection.

Days in Accounts Receivable = 365


Accounts Receivable Turnover

Days in Accounts Receivable = Average Accounts Receivable


Average Daily Sale

Where:

Average Accounts Receivable = Accounts Receivable beginning + Accounts Receivable ending


2
Average Daily Sales = Sales
365

Name of Ratio Formula


Accounts Receivable Net Sales
turnover Average Accounts Receivable

Name of Ratio Formula


Net Sales
Average Accounts Receivable
Accounts Receivable
Example:
turnover
5,385.86
= 612.64 = 8.79x

Name of Ratio Formula


365
Days in Receivable
Accounts Receivable Turnover

Name of Ratio Formula


365
Accounts Receivable Turnover
Days in Receivable Example:
365
= 8.79 = 41.52x
Sample Data

2014
Net Sales 2014P 5,385.862013
Cash
Cost of Goods Sold P 470.31 P 519.86
1,374.79
Accounts
Gross Profit 4,011.07
660.11 565.17
Receivable, Net
Selling Expenses 3,406.46
Inventory
Operating Income 653.06 555.48
604.61
Prepaid
Interest Expenses
Expense 173.74 228.81
11.82
TotalIncome
Net Current P 592.79
1,957.22 1,869.32
Assets
Property, Plant and
5,910.53 5,501.66
Equipment, net
Total Assets P 8,612.95 P 8,092.89

Accounts Payable P 1,273.05 P 1,123.70


Long-term
577.88 541.54
liabilities
Total Liabilities 1,850.63 1,665.24
Owner’s Capital P 6,762.32 P 6,427.65
Total Liabilities and
P 8,612.95 P 8,092.89
Owner’s Capital

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