Every wholesale entrepreneur is concerned with the profit and revenue they generate and that entirely depends upon their Wholesale Business efficiency. To maximise the profits, a wholesale trader needs to pinpoint the issues and needs to identify opportunities as well just to make valuable investment decisions in time. At the same time, financial analysis is also necessary to forecast future earning and to understand cash flow. One of the most frequently used financial ratios is efficiency ratio that is used to determine how a business uses its assets and how well it is managing its liabilities to maximise the profit.
Efficiency Ratio
The ratio shows how quickly a company is collecting its money for its credit sales and how many times inventory turns over in a given time span. It is also checked whether the purchasing efforts are handled efficiently or not. At the same time, calculating efficiency ratio is essential to analyse whether a wholesale business is meeting its short and long term goals or not. Let’s see how efficiency ratio can be calculated and how it affects the success of a wholesale business.
Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio is calculated to check the efficiency of credit policies of a wholesale business. If the ratio outcome is too low, it means the company is being too generous in granting credit to the customers or the company is finding it difficult to collect credit money from its customers. Either situation is not good for business health and success. The wholesale traders must check thier collection policies. This should always be positive and better.
Remember that accounts receivable turnover ratio just includes credit sales. Cash sales are not included in this ratio calculation, as it can affect the result and it may lose its significance. Average accounts receivables are used to calculate accounts receivable turnover ratio to avoid any seasonal discrepancy.
Sales on credit indicate that company is issuing loan to its customers and by calculating this ratio, you will get to know how these loans are affecting the success of a business.
A high accounts receivable turnover ratio indicates that company is either operating on cash or there is a short lapse of time between credit sales and collection of cash. On contrary, high ratio indicates that collection takes longer than average time period or Wholesale Products are sold on credit.
The lower number of this ratio also indicates that accounts receivables are being held for long so the risk of cash not being collected also increases. It also indicates that wholesale traders must reassess their credit policies, stop issuing wholesale products at credit or/and must ensure timely collection of credit sales for the success of business.
Other Efficiency Ratios
Other than accounts receivable earnings ratio, there are three other efficiency ratios named which are: Inventory Turnover Ratio, which indicates how well a business is managing its inventory levels, Accounts Payable Turnover Ratio, which show how a business manages to pay off its bills. The last one is Total Asset Turnover Ratio, which highlighting how well a company is managing both its short and long term assets.
Each and every ratio calculation is essential to help owners understanding and running wholesale business in a better and efficient way. Calculate all these ratios any time during a year to understand the performance of your wholesale business and to get good financial standings in the long run. It will help you evaluating what steps you must take to make your business perform better.
William King is the director of Wholesale Products, Wholesale Business and Wholesale Supplies. He has 18 years of experience in the marketing and trading industries and has been helping retailers and startups with their product sourcing, promotion, marketing and supply chain requirements.