The management of any enterprise, as well as its investors and creditors, are interested in the performance indicators of the company. For a comprehensive analysis, various techniques are used.
Compulsory study the indicators of profitability and business activity. If the first group considers the net profit in the analysis process, then the second - revenue from sales. A study of business activity is carried out using a scorecard. One of the first to study the turnover ratio, the formula of which takes into account all the assets of the company. Next, its structural components are examined. The analysis also includes liabilities. This allows you to understand how quickly the company turns available resources into money, calculated on debt obligations.
The concept of a reverse cycle
The turnover Ratio of the funds of the enterprise allows you to assess how fast the capital of the company goes through its full cycle. The company that owns the resources uses them to manufacture products, sell them and make a profit.
The period for which the organization’s funds go through all the stages is called a turnover cycle. First, resources turn into finished products. Then it is sent for sale. Customers purchase goods or services, and the money is returned back to the organization.
The faster the full cycle occurs, the greater the amount of sales revenue the company receives. Therefore, she is interested in accelerating turnover. Analysis of business activity allows us to identify constraints. The asset turnover ratio, the formula of which considers its structural elements, makes it possible to harmoniously distribute and apply property.
Turnover period
The turnover ratio, the formula of which shows a numerical result, is not always completely informative. Its growth in dynamics indicates a positive trend for the organization. But this indicator does not disclose information about the duration of the cycle.
Therefore, these coefficients represent in days. The analyst can determine exactly how long the period lasts. This allows you to find the optimal value of the coefficient. The researcher evaluates the turnover cycle of fixed and current assets, accounts payable. But it is movable property and short-term obligations that deserve the closest attention . This analysis reflects the system of interaction of the company with suppliers, its sales and material support of current activities.
Cost cycle
Of great interest to analysts in the analysis presented is precisely current assets. Therefore, to assess the applicable turnover ratio of working capital, the formula of which is discussed below.
In order to possess information about the factors influencing this indicator, the financial manager must consider the duration of the cycle of components of current assets. Their duration (except cash) is summarized.
So get an indicator of the cost cycle. The longer it is, the more financial sources the company directs into circulation. They accumulate in it.
The faster the cost cycle occurs, the more funds are released from circulation. They can be used more constructively.
General formula
Calculation of the coefficient of current liabilities or assets has a general view. This is due to the identical indicator with which this or that item of property or capital is compared. The formula is as follows:
Cob = Calculation Base / Asset (or Liabilities).
The turnover ratio, the formula of which is used by the financial services of enterprises, involves taking into account the average annual value of the indicator. Only the item being evaluated changes. The numerator of the formula is also selected depending on the coefficient under study.
When considering receivables, advance payments with customers, their average annual value is compared with revenue from sales of products. If the rate of turnover of debt on loans and advances to suppliers is calculated, the calculation base is the cost. She also participates in the consideration of indicators of turnover of finished products, work in progress.
The inventory turnover ratio, the formula of which corresponds to the above methodology, takes material costs as a base.
Financial statements
To determine the indicators of business activity, apply the data of financial statements. The denominator is found in accordance with Form No. 1 “Balance”, and the numerator is found in Form No. 2 “Profit and Loss Statement”. The asset turnover ratio, the formula of which was considered above, according to the reporting, has the following form:
Cob = s. 2110 (form 2) / s. 1600 environments (form 1).
To determine the current assets turnover ratio, the data in line 1200 of the balance sheet are taken in the denominator. The indicator that determines the turnover of fixed assets in the previous formula applies the data reflected in article 1150 of the balance sheet.
In general, the calculation of the turnover of current liabilities looks like this:
Cotp = s. 2110 (form 2) / s. 1300 environments (form 1).
If investors need to evaluate the speed of borrowed capital, in the presented methodology, the amount c. 1500 and s. 1400. To calculate the turnover of debt of debtors apply the data from. 1230, and stocks - the sum of s. 1210 and s. 1220.
Stocks
When assessing the movement of stocks, it is more appropriate to apply a methodology that shows the result in days. This is one of the most important characteristics that a financial service defines. There should be enough reserves so that the production cycle goes smoothly and without interruptions. But the materials should not accumulate, "freeze" in the current assets of the company.
The inventory turnover ratio, the formula of which was considered earlier, allows you to determine the period in days:
T3 = Material costs / Inventories (medium) * 360.
If the reporting period takes a different number of days, take into account its duration. In general, for the calculation in the numerator use the amount of revenue from sales. But when it comes to stocks, their movement is determined by the amount of material costs.
To optimize the rate and speed up the cycle, it is necessary to reduce the number of “dead” stocks that are not purchased with each new operating period.
Accounts receivable, finished goods
The turnover ratio, the calculation formula of which explores current assets such as receivables and finished products, is also interesting for analysts. If a significant amount of funds accumulates in these balance sheets, this negatively affects the work of the company. If, after the analysis, too long a period of debtor debt turnover is determined, it is necessary to change the system of settlements with customers.
Perhaps you should switch to an advance, non-cash type of payment. The amount of bad debt is also determined.
If an enterprise accumulates a significant amount of finished goods and work in progress, the sales system is revised, equipment is modernized.
Current assets
The duration of the periods of turnover of balance sheet items is added. This allows you to evaluate the effectiveness of the operation of company property. In general, the company's mobile resources allows us to study the current assets turnover ratio (the formula was presented earlier).
The increase in the duration of the cost cycle negatively affects a number of other indicators. The coefficient of total liquidity increases with a decrease in its absolute value. Return on equity is also decreasing. In this case, a whole system of measures is being developed to optimize the structure of the company's property.
Accounts payable
Analysts consider not only the organization’s property cycle rate. They also study the capital turnover ratio (the formula was considered earlier). This methodology shows how many times during the operational period an enterprise settles with creditors on its obligations.
Therefore, the current debt is taken into account for the calculation. Often a company with a large amount of receivables determines a significant amount of current liabilities. This is a negative trend. Such an organization is limited in its ability to attract borrowed capital, to acquire materials, resources for production on credit. By optimizing the structure of assets, it is possible to improve liabilities.
Economical effect
A special place in the financial and economic analysis is taken by turnover ratios. Balance formulas allow you to find constraints on development. A qualitative assessment of business activity makes it possible to determine how effectively the company conducts its business activities.
All indicators obtained during the analysis are considered in dynamics and compared with similar coefficients of competing companies. If the turnover ratio, the formula of which allows you to evaluate the balance sheet structure, decreases, the cycle period is accelerated. At the same time, the organization expands its sales markets; it has regular suppliers and customers. This is a competent commercial policy of the enterprise.
The acceleration of the turnover period indicates a simultaneous increase in return on equity. The company uses its property efficiently. Therefore, the presented system of indicators is necessarily analyzed by the financial department of the organization.