What is management efficiency ratio & its importance

By | 04/18/2018

Management efficiency ratio provides the role of management in the industry to the investor, the management required to be efficient to handle any kind of situation in the company and the management must aware of the bottom line – “profit line”.

Every situation in the business brings two possibilities:

First how to overcome and other is the situation crush them out.

If the management is efficient to tackle the daily movements of the situation, the company itself make money, that was management efficiency ratio.

Some of the retail-based companies, they use to sell the product at the low margin with high volume, that how an efficient company works.

Most common management efficiency ratio

There are some of the common efficiency ratios available for the investor or the analyst to analyze the management efficiency to generate profit from normal activities.

Mark my point it really worth an important place in the business decisions.

Also Read: Tax liability on Car Allowances

Let’s start with:

Inventory turnover ratio

Inventory turnover ratio is the measure of the efficiency of the management that how many times the company route their inventory, in other words:

“It measures the company efficiency how many times company sold its average inventory in the year”.

Inventory turnover ratio reveals two things to the investor:

  1. Even if the sales are good, the company will not dump high stock in the store, because if a large amount of inventory held by the company, the management required to route faster to increase the ratio.
  2. Other Purchase and sales department required to match their tune for avoiding risking dumping of stock and at the same time dropping in the ratio.

Inventory turnover ratio formula

It is simply calculated by dividing total sales by the average of inventory (by adding inventory in the starting of the year and the ending of the year).

Also Read: What is debt-equity ratio & its importance

Inventory ratio = Cost of Goods Sold/Average Inventory

The ratio provides the investor the picture of not spending huge money on inventory if not required, The inventory is also treated as liquid assets.

management efficiency

Investment turnover ratio

In simple words the company generating a return on its investments made in the company. This ratio is used to evaluate the efficiency of the management to compare the sales with debt and equity.

One of the drawbacks of investment turnover ratio is it only indicate the sales of the company with equity but it doesn’t mean that the company generates profit.

there are other segments behind this.

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Assets turnover ratio

Assets turnover ratio measures the company efficiency to generates sales from its assets, the ratio indicates the difference percentage of sales generates from its assets.

Higher the ratio reveals that the company is generating sales from its assets efficiently. Lower the ratio also indicates that there is some issue at the management level or production level, which required to be short it out.

Assets turnover ratio also used to compare the companies efficiency in the same sector:

for instance: shoe manufacturer

A company “A” operates its two machines and generates 22000 nos of shoes monthly and another company “B” operates its three machines and generates 25000 nos, of shoes monthly.

The above scenario indicates that company A is using its assets in an effective way to generate more sales.

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Assets turnover ratio formula

This ratio is calculated by dividing the total sales by average total assets:

Assets turnover ratio: Total Sales/average total assets

Average raw material holding

Holding of raw material both in the higher side and the lower side is not good for the company management.

Why?

Keeping in view, if the management is holding a large amount of raw material the company will in deep trouble of utilizing the outdated material and also required to find out the way to get the investment along with interest back in the books/system.

Also Read: How to pay (₹ 0) Income Tax on CTC ₹ 14,63,000/-

If the holding is low, it will also bring problems of shortage of material if the suppliers or markets conditions changes, raw aluminum rod for aluminum conductor manufacturer is a good example in this scenario.

If the management control both the scenario efficiently, the treatment would be a red carpet.

The same network required to handle the finished goods.

Author Profile

Amit Bansal
Amit Bansal
Hey, Amit Kumar Bansal, the man behind this blog. I always passionate about Taxes, Stock Market. This was one of the reasons why I have chosen the field of account. Blogging was not the coincidence it was a proper decision. The main aim of this blog is to help readers to take an informed financial decision. If you like my efforts kindly subscribe to this blog and also let your friends know about this website by sharing.

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