Efficiency is a maximum output with certain inputs or minimal use of inputs to achieve certain outputs. Efficiency itself is a comparison of output and input associated with performance standards or a target that has been set together.
Efficiency is certainly the most appropriate compared to the desired results. A company will be considered effective if it can achieve its goals efficiently and economically and comply with applicable regulations so that the results are truly maximum from various points of view.
Measurement of efficiency by using the ratio between output and input, ie the greater the output compared to the input, the higher the level of efficiency of a company. From some of the existing material, there may be many things that will be found in relation when a ratio is used to calculate the efficiency of a company.
Of course, not all companies will calculate the efficiency ratio in the same way because what is usually encountered may use several types that we can find in various literatures. For all versions of the ratio, an increase means the company loses a large percentage of its income and if that is considered a good thing for its shareholders or investors.
Such a calculation is necessary so that it can be used to increase output at the same level of input or increase output in a larger proportion than the proportion of increased input that is commonly used so far.
Efficiency ratio is basically the ratio between the company’s assets and liabilities. This ratio analyzes how much the company utilizes its assets and liabilities efficiently. Efficiency ratio alone can help an organization to find out whether the business is making the best use of its resources and generating adequate sales from its investment in equipment and people.
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Funds are invested in various assets in the business to make sales and earn profits. Asset management efficiency directly affects sales volume. The better the asset management, the greater the number of sales and profits. Efficiency ratio measures the efficiency or effectiveness used by the company to manage its resources or assets. This ratio is also called the turnover ratio because it shows the speed at which assets are converted or converted into sales.
Some commonly used ratios are:
1. Accounts receivable turnover
2. Fixed asset turnover
3. Sales to inventory
4. Sales to net working capital
5. Payable to sales
6. Stock Turnover Ratio
Weaknesses of Efficiency Ratio
The current ratio and the acid test ratio give misleading results if current assets include a high number of accounts receivable due to slow credit collection. In the same way, the current ratio can further be misleading if assets include slow-moving inventories. Since these two ratios ignore the movement of current assets, it is important to calculate the efficiency ratio or efficiency to comment on the efficiency of liquid resources used by the company.
Efficiency in business is an important thing and a lot of attention from business people and investors. It is normal that any business person will definitely try to be efficient, because when you can be efficient, it means that the amount of profit you get is also greater. A trader will definitely prefer a simple but profitable trading strategy, because in the world of trading, it will be an efficiency where we don’t have to think much but can make a profit.
A company always tries to achieve efficiency in various ways, from normal to unique ways. For example, when making a product, companies start to use machines a lot because it is proven to be more efficient than using more human labor, because in terms of costs it will be less expensive to buy and maintain machines than to hire more employees. Or if the company is a bit stingy, maybe the AC in the office is turned off and the fan is replaced to make the company’s operational costs efficient.
Now, in the scope of business and investment, because efficiency is one of the things that must be carried out in business operations so that profits are maximized, various indicators of activity ratios (efficiency ratios) have been created whose purpose is to become a quick analysis tool to see if the company’s condition in general is already in place. efficient enough or not. Some of the efficiency ratios that are commonly used for example:
Inventory turnover ratio, or inventory turnover ratio, is the ratio obtained by comparing the number of sales with the average inventory in the warehouse. In the manufacturing industry, the inventory turnover ratio will help one to see if the company can make sales quickly and efficiently in utilizing their inventory. A good ratio value is if the ratio value is more than one, and the bigger the ratio, the better and more efficient the company will be. You see, it means the company can make sales faster and inventory items are not stored in the warehouse for long. That is, the company is profitable in sales and minimal costs in storage.
The total asset turnover ratio, or asset turnover ratio, is a ratio obtained by dividing the number of sales by the total assets of the company. The greater the value of the ratio, meaning the more efficient a company is in managing its assets to generate profits. In other words, companies can also utilize their assets efficiently. For example, if there are two companies with the same amount of assets that generate different profits, it means that the company that produces the larger profit is more efficient.
Well, the two examples of efficiency ratios above are a quick way to judge whether a company is indeed efficient or not. As for the use of this ratio, comparisons must also be made with other similar companies to ascertain whether in the business sector a company is indeed efficient or not. In general, the efficiency ratio is also directly proportional to the profitability ratio, where usually the more efficient a company is, the higher the company’s ability to make profits.
In business activities, the efficiency ratio becomes a mandatory benchmark because this can involve the distribution and availability of the product to be marketed by calculating all inventory and all costs incurred to produce a product. Companies cannot sell products in a short time, especially products that are rarely used, we must pay attention to how effective it is to reduce capital and produce correct efficiency.
