Why activity ratios matter to a first-time founder
Activity ratios show how effectively a company uses assets or short-term operating balances to make sales or collect cash. They can reveal slow inventory, late customer payments or underused assets before those problems become obvious. Track only ratios that fit the business and support a decision.
Examples of activity ratios
A wholesaler records £900,000 of annual cost of sales and average inventory of £150,000. Its inventory turnover is 6, meaning the average stock balance turned over six times. If the ratio falls while sales stay flat, the founder checks for old stock, excessive orders and seasonal build-up.
Common misunderstanding
An activity ratio cannot prove efficiency on its own. Fast turnover may reflect strong operations, stock shortages or an unusually low balance. Formulas differ, and using only a year-end balance can distort a seasonal business. Industry conditions, payment terms and accounting policies also affect comparisons.
When to use it
Use a small set, such as customer-balance, supplier-balance, inventory or total-asset turnover, in regular business reviews. Define each formula, use typical average balances and compare similar periods. Check changes against accounting records and operating data before setting targets or changing policy.