Activity Ratios Definition
Activity ratios are financial metrics that gauge the capability of a business to efficiently manage and control its operational resources, including inventory, accounts receivable, and accounts payable. Additionally the ratios are commonly known as efficiency ratios as they assess the operational efficiency of a business.
Popular Activity Ratio List
There are numerous activity ratios available to monitor different aspects of business efficiency. Accordingly a selection of the most popular ratios are listed below.
- Debtor Days Ratio
- Creditor Days Ratio in Accounting
- Inventory Days
- Inventory Turnover Ratio Calculator
- Accounts Receivable Turnover Calculator
- Days Sales Outstanding
Activity Ratios Analysis
Activity ratios should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.
Additionally in order to give a full picture the ratios should be viewed relative to other ratios calculated for the business. Other ratios include liquidity ratios, efficiency ratios, leverage ratios, profitability ratios, and investor ratios.
Activity Ratio Formulas
There are numerous examples of activity ratios, however, it is important to select the key ratios which relate to your business. Consequently the industry sector, size, and complexity of the business will determine the most appropriate ratios to use. It is important to realize that many ratios may not be relevant or worth calculating, particularly for a small business.
The following list of activity ratios examples are useful to start with.
| Activity Ratio | Activity Ratio Formula |
|---|---|
| Accounts receivable days | Accounts Receivable / (Sales / 365) |
| Accounts payable days | Accounts payable / (Purchases / 365) |
| Inventory turnover | Inventory / (Cost of goods sold / 365) |
Activity ratios are a set of financial ratios that help to measure how efficiently a business is utilizing its assets and resources to generate revenue. These ratios are important because they help the business to assess it’s operational efficiency, identify areas of improvement, and make informed investment decisions.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.