What is an Asset Turnover?

One of the easy ways to get an idea of how efficiently a company is using the resources on hand is to take a look at the ratio of asset turnover. Essentially, it is determined by dividing the current total worth of the company’s assets by the amount of net sales generated within a given period of time. This calculation will provide some insight into whether there needs to be some changes in the sales and marketing strategies of the company, as well as indicate that a new marketing program is beginning to build momentum.

The concept of taking total assets and dividing by the net revenue generated by sales is not a new idea. In fact, businesses have used this simple formula for decades. Understanding total asset turnover will work for any type of business, whether the company is a home based business or an international conglomerate. Every company has assets of some sort, and every company produces goods and services for sale to a consumer market. This measurement can be very helpful in measuring progress in that area.

The result of performing an asset turnover evaluation is being able to see how well the efforts of the company are working, as far as generating revenue for the corporation. A high figure indicates that the current use of resources in the sales and marketing efforts is working, and producing an excellent return. However, a lower number indicates there is a need to rethink current strategies and processes, with an eye toward making better use of available resources.

Finding that the current level of asset turnover is low should not be taken to mean that there is no life left in the company. In fact, using this type of information can be the basis for a whole new image and direction for the company. Since the process of determining this information is directly related to the success of the sales effort, the calculated ratio of asset turnover can help in the process of evaluating the product line, the marketing strategy, the sales and public relations techniques currently in use, and even the manufacturing process.

At the same time, finding that the ratio of asset turnover is actually quite high is an opportunity to look at each process within the company operations and determine which factors are contributing to the success of the organization, and how to help increase that success. Whether as a tool to isolate issues that are holding the company back or to promote continued success, performing an asset turnover calculation now and then can be extremely important to the life of a company.