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.
- 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.
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)|
COGS = Cost of Goods Sold
AR = Accounts receivable
AP = Accounts payable
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 in 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 BSc from Loughborough University.