What is Efficiency Ratios?
Nexa Consultancy | Startup & Finance Glossary
Efficiency Ratios, also known as activity ratios, are used to measure how well a company is utilizing its assets and liabilities internally. They can evaluate the management of inventory, accounts receivable, and accounts payable.
Base Term for Startups: For startups, these ratios are crucial for optimizing operations and improving cash flow. Key efficiency ratios include Inventory Turnover, Accounts Receivable Turnover, and Accounts Payable Turnover.
Base Term for SaaS: While inventory turnover is irrelevant, Accounts Receivable Turnover is very important for B2B SaaS companies that invoice enterprise clients and need to manage their collection period (DSO).
Base Term Calculation: Inventory Turnover = Cost of Goods Sold / Average Inventory
Base Term Example: A D2C startup with a high inventory turnover ratio is selling its products quickly and efficiently, minimizing the cash tied up in inventory.