Let’s get right to it. Previously we wrote about liquidity ratios, which provide good indications on how quickly you are able to pay off short-term debt, and hence how cash rich your company is. If you ahave business and your looking for get a loan check this loan approval tips for business.
. Now let’s look at “Asset Turnover Ratios”.
What does it mean:
Asset turnover ratios provide a measure of how efficiently your business utilizes its assets. Our focus here will be on Accounts Receivables ratios, which are very useful for travel businesses. Inventory ratios can also be calculated in a similar way, but as most travel businesses don’t carry inventory, we have excluded these.
Receivable Turnover Ratio measures how quickly you collect your accounts receivable. Generally, travel businesses have three sources of amounts receivable; amounts receivable from customers, commissions receivable from suppliers, and amounts receiable from your credit card processor (i.e. settlement). Calculating the Receivable Turnover Ratio on the first two (i.e. customers and suppliers) will provide a useful indication on how quickly you are collecting from these two sources.
Receivables Turnover = Annual Credit Sales / Accounts Receivable
Receivables Turnover = Annual Gross Sales/ Accounts Receivable
To be useful, for the supplier receivables turnover, it is better to use the annual sales where commission is owing from suppliers – i.e. total gross sales for which the the supplier owes you commission, as opposed to cases where you collect the full amount from the customer and pay the supplier the net cost. However, most systems don’t provide such granular information and therefore getting the amount of “annual commission-owing sales” may not be possible. As an alternate, you could just use “Annual Gross Sales” instead. The idea is to take this measure and compare it against previous years ratios to see if you are getting better or worse.
Collection Period provides similar information to the receivables turnover ratio, but expresses it in number of days it takes to collect the amounts receivable (and therefore, may be more meaningful).
Average Collection Period = 365 / Receivables Turnover
Some points to note when using any of these financial ratios is:
* To be meaningful, you need a reference point against which to compare the result. Therefore, you could compare the results against the previous years for your business, or against other travel businesses. We are currently working on features/reports within the Merang TravelOffice system that will enable you to do both; compare against your historical ratios and compare against the general average ratios combining all our clients in the system (but not against any specific client).
Remember these are just indicators to get a pulse of the business.