Asset Management


Every company has some assets. Assets may be vary according to the business interest of the company and may be categorized as fixed assets, movable assets, inventory, receivables etc. Asset turnover is in general a financial ratio or efficiency ratio that is used to measure the efficiency of the company is being able to convert its assets to profits or sales. Assets are generally large in capital intensive industries like the manufacturing sector. It is very important that these companies justify their assets by generating sales so that the capital that has been invested in assets does not go waste. Asset turnover is a quantitative measure of the efficiency of the company in generating sales using its assets. Asset turnover can be given by a simple formula.

Asset turnover = Total sales/total assets

If this ratio is large, this means that the company is fully efficient in converting its assets to sales. However, a low ratio indicates that the sales are sloppy, or the company has invested surplus amount in its assets which also include maintaining the inventory and surplus stock. There are many things which contribute to asset turnover. Every company maintains some inventory, which is the raw material used to manufacture the stock. Surplus inventory causes the denominator in the formula to grow and hence brings down the ratio. Incorrect prediction about sales and stocking surplus finished goods also has similar impact on the ratio. Another important factor that has a lot of impact on the ratio is the average collection period or the time the company takes in collecting payments from its customers.

Asset Management


Asset management is the activity of managing these assets in such a way that the asset turnover ratio is increased. Asset management includes taking a number of steps in the direction of converting assets to sales and hence improving the efficiency of the company.

Let us understand this better with an example. Suppose a manufacturing company stocked surplus inventory because of they were getting off season discounts but later they discovered that they would not be able to use the inventory to produce an equivalent amount of finished goods and then generate an equivalent amount of sales through them. The asset management department may than take a decision to sell of the surplus inventory to another vendor at the existing market rates. This would have two benefits. Firstly, the company would successfully reduce the amount it had spent in maintaining the inventory (asset) by recovering a portion of it through sale and secondly, the company may also make profits through the sale of inventory at existing market rates which may be higher than the off season prices. Selling of surplus stock at discounted rates or selling of assets which are not being utilized properly also come under asset management. The overall aim of asset management is to improve the asset turnover ratio.

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