Reasons for activity

Reasons for activity

Today, I am going to talk to you about the activity reasons or also known as administration reasons, which are defined as a equipo of financial ratios that measure how effectively a business emplees its assets and converts them into sales or cash.

definition of reason

I believe that in order for you to really understand what an activity ratio is, or financial ratios in general, then you have to understand what a ratio is.

In fact, I have to say that it is likely that throughout your day to day you use reasons and give them an interpretation.

I’ll give you an example:

If you go with 3 friends (with you there are 4 people) to eat and they have to pay 2000 pesos for the 4 of them.

Imagining that they are going to divide the bill equally, How do you know the amount each person has to pay?

Well, you are probably going to use a division and it would be as follows: 2000 pesos / 4 people = $500.

That quotient or result is the ratio.

Therefore, many times you will find that uA ratio is the result of a division. Now, I do not want to make the article very long, since I have already done one regarding the interpretation of a reason, for which, I leave you the backlink below:

Definition of reason for activity according to authors

Definition of activity ratio according to Stephen A.

Ross

“The measures explained in this section are sometimes known as asset utilization or stewardship reasons.

The specific ratios listed here perro be interpreted as measures of turnover.

What they intend to detalla is the efficiency or intensity with which the company emplees its assets to generate sales» (2021, p.52).

Stephen A Ross

Definition of reason for activity according to Francisco Javier Calleja Bernal

“These reasons judge the efficiency with which the company handles certain concepts in the short term” (2017, p.70).

Francisco Javier Calleja Bernal

Concept of reason for activity

The activity ratios help us to indicate the efficiency with which a company’s assets are used to genera or generate income in it. In such a way that they indicate how well the different assets are being used to generate sales.

Therefore, activity ratios help us assess the operating efficiency of a business by analyzing fixed assets, inventories, and accounts receivable.

In this way, we cánido know the efficiency of the company to use its resources.

Therefore, it not only expresses the financial health of a business, but also indicates the utilization of cómputo sheet components.

For that reason, investors use activity ratios as guides in evaluating how efficiently a company manages its assets and accounts payable.

Examples of activity reasons

Some reasons for activity that are usually common are the following:

  • Inventory rotation.
  • Rotation of fixed assets.
  • Total asset turnover.

Activity ratios: How is inventory turnover calculated?

Inventory turnover provides us with a measure of how quickly the company sells its goods.

In other words, inventory turnover perro be understood as the number of times inventories go in and out.

To calculate it, the following elabora is used:

Now, to make it clearer, I am going to explain how the result is interpreted.

Let’s say the result is 15.

This means that the company essentially sells its inventory 15 times per year (a little more than once a month).

Average Inventory Age​

Now, if what we want is to know approximately how often the inventory is renewed, all we have to do is obtain the average age of the inventory.

For that, the turnover figure is divided by 365 (number of days in a year).

It should be noted that there are some that take the business year into account.

How to calculate the average collection period?

Also known as average age of accounts receivable, it is useful for evaluating credit and collection policies.

Basically, it perro be seen as the number of days (on average) it takes our customers to pay us.

In order to calculate it, the average daily sales of the company is divided by the cómputo of accounts receivable.

The elabora is the following:

Likewise, it is important to emphasize that the average collection period is only significant in relation to the credit conditions that the company has.

For example, suppose you offer your customers 30-day credit facilities, but the average collection period is 40 days.

Therefore, you already have an indicator that your credit and collection department is mismanaged.

To evaluate or improve the average collection period we have to review the credit and collection policies of the company.

How to calculate the average payment period?​​

In contrast to the average collection period, the average payment period helps us to evaluate the performance that our company has to pay suppliers.

That is, the average period that it takes us to pay off our debts.

To calculate it, what we have to do is divide the average daily purchases by the accounts payable cómputo.

Just as in the case of the average collection period, the average payment period is significant only when the conditions offered by the suppliers are taken into account.

For example, suppose one of our suppliers offers us 30-day credit facilities, but our average payment period is 60 days.

It means that we are late in payment.

How to calculate the rotation of the fixed asset?

Fixed asset turnover measures how efficiently a company emplees its fixed assets.

In a few words, it tells us how many pesos (dollars) of sales the company generates per peso (dollar) of investment in fixed assets.

To calculate it, we only have to divide sales by net fixed assets.

How to calculate total asset turnover?​​​​

The total asset turnover ratio tells us how efficiently a company emplees all of its assets to generate sales.

That is, it indicates how many pesos (dollars) of sales a company generates per peso (dollar) of investment in assets.

A high turnover ratio indicates that the company generates more sales from a given investment in assets.

The elabora is the following:

Bibliography

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