# Turnover Ratio or Asset Management Ratio

TURNOVER RATIO OR ACTIVITY RATIO  or  ASSET MANAGEMENT RATIO Turnover ratios are also known as activity ratios or efficiency ratios with which a firm manages its current assets.  The following turnover ratios can be calculated to judge the effectiveness of asset use. Inventory Turnover Ratio Debtor Turnover Ratio Creditor Turnover Ratio Assets Turnover Ratio  1.  INVENTORY TURNOVER RATIO This ratio indicates whether investment in stock is efficiently used or not, in other words, the number of times the inventory has been converted into sales during the period.  Thus it evaluates the efficiency of the firm in managing its inventory. It helps the financial manager to evaluate the inventory policy.  It is calculated by dividing the cost of goods sold by average inventory. Inventory Turnover Ratio = Cost of goods sold / Average Inventory (or) Net Sales / Average Stock  Cost of goods sold = Sales-Gross profit Average Stock =Opening stock + Closing stock/2  2.  DEBTOR TURNOVER RATIO Debtors play a vital role in current assets and to a great extent determines the liquidity of a firm. This indicates the number of times average debtors have been converted into cash during a year.  It is determined by dividing the net credit sales by average debtors. Debtor Turnover Ratio = Net Credit Sales / Average Trade Debtors (or) Net Credit Sales / Average Debtors – Average Bills Receivable Net credit sales = Total sales – (Cash sales + Sales return) Total debtors = [ Op.Dr. + Cl.Dr. / 2 + Op.B/R + Cl. B/R / 2]   When the information about credit sales, opening and closing balances of trade debtors is not available then the ratio can be calculated by dividing total sales by closing balances of trade debtor Debtor Turnover Ratio = Total Sales / Trade Debtors Note: Bad and doubtful doubts and their provisions are not deducted from the total debtors. The higher ratio indicates that debts are being collected promptly. 3.  CREDITOR TURNOVER RATIO This is also known as “Creditors Velocity”. It indicates the number of times sundry creditors have been paid during a year.  It is calculated to judge the requirements of cash for paying sundry creditors.  It is calculated by dividing the net credit purchases by average creditors. Creditor Turnover Ratio = Net Credit Purchases / Average Trade Creditor (or) Net Credit Purchases / Average Creditors + Average Bills Payable Net credit purchases = Total purchases – (Cash purchase + Purchase return) Total Creditors = [Op.Cr. + Cl.Cr. / 2 + Op. B/P + Cl. B/P / 2]   The higher ratio should indicate that the payments are made promptly. Net credit purchases consist of gross credit purchases minus purchase return.  When the information about credit purchases, opening and closing balances of trade creditors is not available then the ratio is calculated by dividing total purchases by the closing balance of trade creditors. Creditor Turnover Ratio = Total purchases / Total Trade Creditors  4.  ASSETS TURNOVER RATIO The relationship between assets and sales is known as assets turnover ratio.  Several assets turnover ratios can be calculated depending upon the groups of assets, which are related to sales. a)      Total asset turnover. b)      Net asset turnover c)      Fixed asset turnover d)      Current asset turnover e)      Net working capital turnover ratio a. TOTAL ASSET TURNOVER This ratio shows the firms ability to generate sales from all financial resources committed to total assets.  It is calculated by dividing sales by total assets. Total asset turnover = Total Sales /  Total Assets b. NET ASSET TURNOVER This is calculated by dividing sales by net assets. Net asset turnover =Total Sales / Net Assets Net assets represent total assets minus current liabilities. Intangible and fictitious assets like goodwill, patents, accumulated losses, deferred expenditure may be excluded for...

# Debtor Management or Receivables Management

Debtor Management or Receivables Management Profit is directly proportional to the volume of sales, provided all your business transactions are cash based. Is it possible for a manufacturer, wholesaler or retailer to carry on his business without offering credit in this competitive business environment? The answer is a definite “no”, because extension of credit improves your sales and thus your profit. Problems arise only when a firm is not able to recover the debt within the stipulated period of time from the customers. What is receivables management or debtors’ management? It covers two aspects- one, the kind of money that is being invested in debt rotation; second, the risk factor which includes loss of money or the opportunity cost foregone by the organisation. Had these funds not been tied in receivables, the firm would have invested the same elsewhere and earned income thereon. A transaction entirely through cash is definitely a possible option, but whether it is lucrative in the long run must be subject to consideration. When customers are not offered credit, they choose concerns that extend credit facilities and thus you may lose your earlier customers and also exposed to the risk of declining sales proportions. Credit Sales In credit sales, the supplier offers credit for a specific time period, which is an investment from the angle of supplier and largest single source of short term financing from the angle of the customer. The supplier should be able to recover the amount of interest on the credit investment he has made. How? Recovery of debt within the stipulated credit period Taking interest from the customer for the period of delay Volume sales Surplus capital to offset these negative impacts on rotation of funds Proper formulation and execution of credit policies by the finance manager Discipline in collection policy and its execution. Discounts Cash discounts, quantity discounts and trade discounts are offered by many firms to the customers to encourage credit sales, favoring bulk purchases. A firm cannot be expected to survive long by pursuing the policy of cash sales while similar firms can overtake it by adapting to liberal credit policies. The main aspects of receivables management decisions are as follows: Time period of credit Credibility of the customer Cash discounts Trade discounts Learn the basics of the Income Statement, Balance Sheet and Cash Flow Statement and understand how they fit together. Credit Policy Credit policy on one hand stimulates sales and so also its gross earnings, but on the other may be accompanied by added costs, such as: 1) Clerical expenses involved in investigating additional accounts and servicing added volume of receivables, 2) increased bad-debt losses due to credit extension to less credit worthy customers, 3) higher cost of capital. Incremental earnings from increased sales should be matched with incremental costs that arise due to credit terms, to avoid funds being tied up in receivables. In course of time it would deprive you of your profits. The pivotal consideration of your credit policy would be the selection of credit worthy customers or debtors. If your funds become sticky, recovery becomes next to impossible and you need to proceed legally to claim your rights. Properly maintained accounting records and vouchers will stand as a testimony in your favor, in the court of...