A Brief Introduction to Efficiency Ratios

The founder and managing director of Strategic Consulting in Minneapolis, Minnesota, Aaron Eichler helps organizations deploy business strategies, create value, and maximize growth. Possessing upwards of two decades of leadership experience, Aaron Eichler also works with clients to improve their operational efficiency.

As with many things, improving efficiency starts with evaluating where a company is starting. This involves several efficiency ratios that measure different aspects of performance.

Efficiency ratios demonstrate how well a company is using its resources, such as assets, to generate income. They include measurements such as the inventory turnover ratio, asset turnover ratio, and accounts payable turnover ratio. As evidenced by the name, these ratios focus on different assets and liabilities in a business and indicate where a company may be having issues with cash flow. For instance, a low inventory turnover ratio indicates high inventory levels.

The efficiency ratios are effective regardless of the sector in which the company operates because they indicate how efficiently a company is running based on its own metrics rather than comparing its data to other businesses.