Efficiency ratios also called activity ratios show how well companies utilize their assets to generate income. Efficiency ratios often look at the time it takes companies to collect cash from customer or the time it takes companies to convert inventory into cash, known as recievable period. These ratios are used by management to help improve the company as well as outside investors and creditors looking at the operations of profitability of the company. Efficiency ratios go hand in hand with profitability ratios. Most often when companies are efficient with their resources, they become profitable.

By recording ratio, formula and explanation the businesses can quickly assess the relevant information for accounting purposes.

Efficiency ratios also called activity ratios measure how well companies utilize their assets to generate income. Efficiency ratios often look at the time it takes companies to collect cash from customer or the time it takes companies to convert inventory into cash—in other words, make sales. These ratios are used by management to help improve the company as well as outside investors and creditors looking at the operations of profitability of the company. Efficiency ratios go hand in hand with profitability ratios. Most often when companies are efficient with their resources, they become profitable. Wal-Mart is a good example. Wal-Mart is extremely good at selling low margin products at high volumes. In other words, they are efficient at turning their assets. Even though they don't make much profit per sale, they make a ton of sales. Each little sale adds up.

The activity ratios includes ; (1) Inventory turn over = sale/Inventory or Cost of goods sold / Average Inventory (2)fixed Assets turn over =sales/fixed assets .The ratio of sales to fixed assets measures the turn over of plant and equipment. (3) Total assets turn over = sales/total assets, this measures the turn over of all firms assets . (4) Average collective period;this measures the accounts receivables turn over.it is computed in two steps ; (a) Annual credit sales are divided by 360 days to get the daily credit sales . (b) The daily sales are divided into accounts receivable to find the number of day's sales is tied up in receivables . This is defined as the average collection period , because it represents the average length of time that the firm must wait after making a credit sales before receiving cash .

What is the meaning of Activity or Effective Ratio ?

What are key ratios - efficiency?

Efficiency ratios also called activity ratios measure how well companies utilize their assets to generate income. Efficiency ratios often look at the time it takes companies to collect cash from customer or the time it takes companies to convert inventory into cash—in other words, make sales. These ratios are used by management to help improve the company as well as outside investors and creditors looking at the operations of profitability of the company. Efficiency ratios go hand in hand with profitability ratios. Most often when companies are efficient with their resources, they become profitable. Wal-Mart is a good example. Wal-Mart is extremely good at selling low margin products at high volumes. In other words, they are efficient at turning their assets. Even though they don't make much profit per sale, they make a ton of sales. Each little sale adds up

Turnovers.

Today and in the future, however, all financial institutions should begin looking at efficiency with a much more discernible eye, and make it a primary concern when developing their growth strategies

Ratios clave - la eficiencia, la eficiencia si esta en porporcion de una serie de acciones y decisiones tomadas oportunamente