In business, measuring performance is important to determining how well a company achieves its goals and objectives. A common term is efficiency, which results when companies have little waste or downtime when running operations. Efficiency ratios are a common measurement tool.
Business owners and managers may have different definitions of efficiency in their companies. One definition may be spending less money than is budgeted, or high production output while using lower quantities of raw materials, or reducing capital spent on labor while achieving customer-service goals. Maximizing profit from the available labor and resources should be the goal.
Asset turnover ratios are mathematical formulas that allow business owners and managers to calculate benchmarks for efficiency. For example, receivables measure how well the company collects cash and inventory turnover calculates how well the company sells through its entire set of goods.
Efficiency--as determined by the ratios--indicates how well the company completes regular business tasks. When collecting receivables, a lower number is best because it means the company does not wait too long for collecting cash. High inventory turnover ratios indicate the company sells through inventory more times in a year, resulting in higher profits.