Activity Ratio

An activity ratio measures how efficiently a business uses its assets to generate revenue. The higher the ratio, the faster assets are turning into sales and, eventually, cash.

The Main Activity Ratios

• Asset turnover: Revenue ÷ average total assets. How many dollars of sales each dollar of assets produces.
• Inventory turnover: COGS ÷ average inventory. How many times a year stock is sold and replaced.
• Receivables turnover: Revenue ÷ average accounts receivable. How quickly customers pay.
• Payables turnover: COGS ÷ average accounts payable. How quickly the business pays suppliers.

Worked Example

A wholesaler has revenue of $1,200,000, average total assets of $600,000, and average inventory of $150,000 with COGS of $900,000.

Asset turnover = $1,200,000 / $600,000 = 2.0

Inventory turnover = $900,000 / $150,000 = 6.0

Each dollar of assets produced two dollars of sales, and stock turned over every two months. If inventory turnover slid from 6.0 to 4.0, the same sales would need $225,000 of stock instead of $150,000, tying up an extra $75,000.

How Do You Read Activity Ratios?

Direction matters more than the absolute number. A falling turnover ratio means assets are working less hard: stock sitting longer, customers paying slower, or capacity idling. Compare against your own prior periods first, then against businesses with a similar model. A supermarket and a machine shop will never share a benchmark.

How Activity Ratio Affects Your Cash Flow

Activity ratios measure how fast you turn assets into sales and sales into cash. A slow ratio means cash is trapped in inventory or receivables. Cash Flow Frog shows that trapped cash on a forward timeline: slower collections push receipts later in the forecast, so you see the bank-balance effect of a slipping ratio before it becomes a shortfall. The receivables side of this is covered in more depth under asset turnover.