What is Asset Turnover Ratio?
Asset turnover ratio is a key performance indicator (KPI) that shows how efficiently a company is using its owned resources to generate revenue or sales. The ratio compares the company’s gross revenue to the average total number of assets.
Asset Turnover Ratio= Gross Revenue/Average Total Assets
The asset turnover ratio is typically used by third parties – such as investors and creditors – to evaluate the efficiency of a business’s operations. By comparing companies in similar market segments, investors and creditors can discover which companies are getting the most out of their assets and what weaknesses others might be experiencing.
Can the Asset Turnover Ratio be increased by increasing the productivity of resources by optimizing the way they spend their time or the way these resources are being utilized?
Asset Turnover Efficiency
In general, the higher the asset turnover ratio, the more efficient the use of the company’s assets. It is important to note, however, that the asset turnover ratio will be higher in some sectors than in others. For example, retail organizations generally have smaller asset bases but high sale volumes, which creates high asset turnover ratios.
On the other hand, businesses in sectors such as manufacturing, utilities and real estate often have large asset bases, but low sale volumes, which creates much lower asset turnover ratios.
IT industry has both Tangible and Intangible assets. How do we calculate Asset Turnover ratio in IT service industry? How Asset performance management (APM) works when assets are not completely tangible?
Most companies calculate the asset turnover ratio on an annual basis, using balance sheets from the beginning and end of the fiscal year. The ratio can be calculated by dividing gross revenue by the average of total assets.
Asset performance management (APM) is both a strategy and a set of software tools for tracking and managing the health of an organization’s physical assets. In IT environment asset such as Software Licenses, IT assets, real estate, transportation and utilities have operation life cycle and we need to understand the nature of these critical assets for better asset performance management to calculate Asset Turnover Ratio.
Building the Equation
To understand Asset Turnover Ratio in IT industry let us define the cost of the main asset of an IT industry, i.e. resource. Salary is the major expense to acquire this asset and other overheads including consumptions, seating cost, variables, transportations, facilities and support staff are the additional cost for this assets functioning. One of the simplest equations is to sum all the cost of all the resource of one region or one business unit against all the revenue earned over all these resources through client billing or revenue earned.
ATR = (Sum of Revenue Earned) / (Sum of Salary + Real Estate + All Other overheads)
Sales Asset Turnover Ratio = Total Sales Total Expense (Salary+License+Real Estate+Consumables)
The expenses and overheads will change from company to company. Some IT companies also calculate Margin Per Head or profit Per Resource. In an IT company dealing with product development, to IT services to software development – Profit per head is highest in IT Financial Services followed by Software Development portfolio.
Can the Asset Turnover Ratio be increased by increasing the productivity of resources by optimizing the way they spend their time or the way these resources are being utilized.
Asset Turnover in Sales
To understand your sales reps performance there are various key performance indicators like Quota Attainment, Win Rate, Profit Margins, Total Sales Volume (Sales Revenue), Absolute number of Wins, etc. How do we find out our best sales reps and if we define them as assets to build the company how do we calculate asset turnover ratio on company’s overall sales force or on individual sales reps and once we have the ATR for individual sales rep how do we identify the best ones. We can do pattern recognition and predictive analytics to identify the best ones, and cluster of best ones in the future. – Few Parameters –
|Total Work Experience
|Total Tenure in Company
|Quota Attainment %age
|Win Rate %age
Asset Turnover Ratio for sales can be defined in terms of Quota Attainment, Win Rate, Profit Margin or Total Revenue against the cost of total assets (Salary + Overheads).
About the Leader
Devansh Chaurasiya is an MBA with 15 years of IT experience. He holds an exemplary expertise in delivering strategic business projects, digital transformation, business intelligence and analytics within sales, CPG, and supply chain domain. He stands tall in driving business outcomes and nurturing young talent. He believes coordination, collaboration, and change management are the key differentiating skills for better management and growth.