Asset Utilization (AU)
Asset utilization (AU) measures how efficiently a company uses its assets (financial, tangible and intangible assets) to generate revenue or attain its intended purpose. It assists identify waste, optimize resource allocation, and enhance profitability. AU represents a key performance indicator (KPI) that reflects how well a business utilizes its resources, for example equipment, machinery, and human capital, compared to their potential capacity. Higher asset utilization ratio generally indicates greater profitability and efficiency.
Asset Utilization Metrics
Day Sales Outstanding (DSO)
DSO is a financial metric that measures the average number of days it takes a company to collect payment after a sale has been made. It indicates how efficiently a company manage its accounts receivable and convert sales into cash. A lower DSO generally shows better cash flow and more effective and efficient collections.
- Formula for calculating DSO: (Account Receivable / Total Credit Sales) x Number of Days
Inventory Turnover (IT)
Inventory turnover is an important metric that indicates how efficiently a business manages its inventory. it measures how frequently a company sells and replaces its stock of goods during a specific period, usually a year. A high inventory turnover rate implies efficient inventory management, vital sales, and potentially better cash flow, while a low rate often indicates overstocking or slow sales.
- Formula for calculating Inventory Turnover: Cost of goods sold (COGS) / Inventory
Factors Affecting Inventory Turnover:
- Product Life Cycle: Turnover rates may vary as products move through their life cycle (growth, maturity, decline).
- Seasonality: Demand for certain products may fluctuate based on seasonal patterns.
- Industry Benchmarks: Different industries have varying norms for inventory turnover.
- Inventory Management Practices: Efficient ordering, storage, and sales strategies can positively impact inventory turnover.
Days Sales in Inventory (DSI)
DSI, also known as inventory days outstanding or days sales of inventory, is a financial metric that measures the average number of days it takes a company to sell its inventory. It indicates how efficiently a company managers its inventory and how fast it converts its into sales.
- Formula for calculating DSI: (Average Inventory / Cost of Goods) x Number of Days
Where:
- Average Inventory: (Beginning Inventory + Ending Inventory) / 2
- Cost of Goods Sold (COGS): The direct costs associated with producing the goods
- Number of Days: Usually 365 days for a full year.
A lower DSI is preferable as it suggests that a company is efficiently selling its inventory and quickly turning it into revenue.
A high DSI suggests that a company may be holding onto inventory for a longer period, potentially owing to slow sales, overstocking, or other issues with inventory management.