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Hitting the Numbers: Make Your Fixed-Asset Turnover Ratio Shine

turnover-ratio-shine-banner Growing a profitable business is both challenging and rewarding. Closing a big sale or introducing a new product can be energizing. However, it is the back office and financials that often separate strong companies from those who merely struggle to survive. When it comes to financial management, there are a number of ratios that allow executives and managers to quickly assess the health of their businesses in a variety of areas. From measures of liquidity to monitoring accounts receivables, these ratios are important tools of proactive management teams.

The Fixed Asset Conundrum

Capital investment in fixed assets is what provides the competitive edge in many industries. With rapidly changing technologies, having the right equipment is a driving factor in everything from productivity to pricing to product development. At the same time, having too much precious working capital invested in outdated, excessive, or poorly maintained assets can be a major drag on profitability and returns on capital. In general terms, the more sales a company generates with the least amount of money invested in fixed assets, the greater that company’s return on equity and investment. Another way of looking at the issue is to seek to invest only what is needed to be as competitive as possible but no more than necessary.

Striking the Balance

iStock_00002006296Achieving this objective requires that management know the current level of assets at any given time. One part of this process is tracking the assets on hand and monitoring the total investment. Of course, many small and mid-sized companies do not have that information readily available, making such assessments impossible. Surprisingly, many large companies also fail to accurately monitor their fixed assets. Instead of actually tracking fixed assets, many of these businesses rely primarily on a bookkeeping number driven by accounting transactions such as depreciation. If an accurate inventory of fixed assets is maintained, it allows use of an important financial ratio. Companies with even moderate levels of investment in their assets can use the fixed-asset turnover ratio. This is a number calculated by dividing the net sales of a division or company by the total of the value of fixed assets. This number serves two purposes. First, it provides a snapshot at any given time to evaluate how a company is performing against expectations and industry standards. It is a measure of how efficiently the investment in fixed assets is utilized to produce net sales. The second value of the ratio is its use to evaluate trends in this efficiency. Specifically, if the ratio declines period-to-period, it may indicate an overinvestment in such fixed assets as equipment, plant or other elements of production. This trend can also show a failure to monetize unused or under-used equipment when it is replaced with newer items.

Inventory Made Manageable

Many companies fail to adequately manage critical elements of business such as fixed assets and inventory due to concerns over the difficulty of the task. However, companies such as Wasp Barcode Technologies have focused on making such tracking affordable and efficient. Wasp has a number of industry-specific solutions that make real-time tracking of fixed assets a reasonable corporate priority. A call to Wasp will provide access to systems and processes that have transformed the data collection and tracking function for large and small companies in a range of industries.