What is Asset Performance?
Asset performance is an accounting and economic term relating to the performance of capital investments in a business. Most companies spend large amounts of capital adding assets, such as buildings, facilities, equipment or vehicles, to their business operations. Companies use asset performance techniques to determine how well these assets are being used in business operations to generate profits. While no single technique or criteria exists for measuring asset performance, companies may use traditional financial ratios or other basic methods to assess asset performance.
Companies may review asset performance on an individual or aggregate basis. The type of review process will depend on the number of assets owned by a business and the specific operations of the company. Companies may use a simple output method for determining how well an asset performs in the business. The output review method separates each asset in the company and reviews how much output the asset produces when using the company’s economic resources or business inputs. If an asset is significantly underperforming when compared to other similar assets in the business, it may indicate a problem or an issue that needs to be reviewed by operational managers.
Companies may also attempt to review their asset performance against the industry standard or a major competitor. Using a comparative analysis allows the company to set a benchmark for how well the asset should be performing when producing goods or services for consumers. Companies often use asset turnover ratios when conducting comparative reviews on asset performance. Asset turnover ratios are usually broken down into a few different groups; these groups include accounts receivable ratios, inventory turnover ratios and fixed asset or total asset turnover ratios.
Accounts receivable asset ratios determine how well the company is collecting money owed to them by clients or customers. Accounts receivable are short-term assets that represent past sales that may quickly fall behind in the collection process, decreasing the overall profits of the company. Companies with short account receivable collection times often have efficient accounting operations.
Inventory turnover ratios allow companies to determine how well they sell inventory. Many companies sell some form of inventory to consumers; inventory asset performance is a crucial financial ratio that tells companies how quickly they sell through their inventories. Sluggish inventory sales may mean companies will be stuck with obsolete inventory that cannot be sold in the economic marketplace.
Fixed asset or total asset turnover ratios help companies use mathematical calculations to gauge the overall performance of major assets. This ratio can also determine whether the company has spent too much money acquiring assets to produce goods and services. Overpaying for these assets can limit the company’s ability to remain flexible when economic shifts occur in the economic marketplace from consumer demand or behavior.
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