What are Activity Ratios?

Activity Ratios Definition

Activity ratios are used to measure the ability of a business to convert different balance sheet accounts such as inventory, account receivable, and accounts payable into cash or sales.

An activity ratio is a measure of the managements ability to control the resources of the business.

Popular Activity Ratio List

A selection of popular activity ratios from the Double Entry Bookkeeping Ratios Guide.

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.

In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as liquidity ratios, efficiency ratios, leverage ratios, profitability ratios, and investor ratios.

Activity Ratios Formula

There are numerous examples of activity ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many 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 Ratios Activity Ratios Formulas
Accounts receivable days AR / (Sales / 365)
Accounts payable days AP / (Purchases / 365)
Inventory turnover Inventory / (COGS/ 365)
Variables used in the formulas
COGS = Cost of Goods Sold
AR = Accounts receivable
AP = Accounts payable
Last modified November 6th, 2016 by Team

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