How this calculator works
Operating assets are the resources a business uses in its day-to-day operations: cash needed for working capital, accounts receivable owed by customers, inventory, prepaid expenses and the property and equipment used to trade. Investments that are not part of operations are left out. Sales divided by operating assets gives turnover, the number of sales dollars generated per dollar of assets. A higher figure means the business runs on a leaner asset base. Turnover varies enormously by industry: a grocery chain may turn its operating assets several times a year while a utility with heavy equipment may turn them only once.
Formula
Operating assets = cash + accounts receivable + inventory + prepaid expenses + fixed assets. Operating asset turnover = annual sales / operating assets. Sales needed = target turnover x operating assets.
Worked example
Cash of $50,000, receivables of $80,000, inventory of $70,000, prepaid expenses of $10,000 and fixed assets of $300,000 total $510,000. Sales of $1,200,000 give a turnover of 1,200,000 / 510,000 = 2.3529. To reach a target turnover of 2.5 on the same asset base the business would need 2.5 x $510,000 = $1,275,000 of sales.
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Frequently asked questions
Should operating assets be an average of the year?
Yes, when the data allow. Assets move during the year, so averaging the opening and closing balance gives a more representative figure than the closing balance alone. The same rule applies to receivables and inventory in their own turnover ratios.
Why exclude investments and idle land?
The ratio is meant to show how productively the business uses assets in its operations. Marketable securities and land held for future development do not generate sales, so including them would understate how well the operating assets perform.
What does a falling turnover mean?
Either sales are weakening or assets are growing faster than sales. Compare the change in each component to see where money is collecting, such as rising inventory or slower collections. A rising turnover with falling sales can also be a sign of selling off assets, so read it with the dollar amounts.