The first question is, “What is the best way to calculate asset turnover for a company?” The answer is not as simple or obvious as you might think. This is especially true if you run a small business. Your assets are those resources that your company uses in order to do business every day. This may include equipment, furniture, supplies, inventory and more.
Many companies are highly leveraged. They have many employees who are paid on a regular basis, and they receive a large portion of their profits from their assets. Other companies are much less leveraged, and their assets are usually long-term loans or leases. When these assets mature they will sell them for a low price, or they will simply pass them on to the heir or beneficiaries. It really depends on the company, its needs, and the state of its balance sheet.
Now, how to calculate asset turnover for a business is a challenge all on its own. For starters, it involves several complicated mathematics and business principles that can be very confusing and difficult to grasp. But there is an easy way to approach this problem. This method is called the Cash Flow Model, and it is very simple. This is also what I teach my students when they want to learn how to calculate asset turnover for a business.
First, let’s look at the definition of cash flow. According to the National Association of State Boards of Equalization, cash flow is the “ability to pay an obligation when it is due.” In business, this means that your business has the right (and possibly the responsibility) to pay you the cash that you owe when you owe it, and when you can possibly pay it. The cash flows involved in doing business will vary based on the needs of each business and the existing conditions. So, in essence, cash flow is what keeps a business going.
Now, let’s look at how to calculate asset turnover for a business. Under the Cash Flow Model, assets are transferred from the business to the owner or custodian of those assets when the owner or custodian dies, or when the business ceases to exist. This occurs when the assets are transferred to a willing buyer. Under the NABE definition, the method of transfer is usually determined by the most prudent means available to the business owners at the time of transfer.
For instance, suppose your business had a customer who owed a substantial amount of money to you, but you had no assets of your own to secure the loan. Assume also that this customer was willing to pay you the entire amount owed in one lump sum, but you weren’t holding any stocks or bonds that could be bought to pay that loan off. You would face a difficult decision – you might decide to sell all of your assets, including your stock and bonds, to pay off the loan, or you might decide to keep your customer and hope that he or she will find a buyer who is willing to pay off the loan balance. Your choice is determined by how much equity and cash flow your business currently has compared to the value of those assets.
How to calculate asset turnover is a very important process because it determines the sustainability of your business. If you operate a small business with only a few employees, you can easily calculate your asset value just by considering the present employment value of your employees, plus the value of your equipment, furniture, and supplies that you have purchased and that your customers currently have access to. You will then subtract your investment in machinery, office furniture, and supplies from the value of your total assets. This value will then be multiplied by the number of employees you have (assuming you have any). Subtract this amount from the current value of your assets and you will get your current assets’ value. The calculation is easy – it’s all about subtraction.
It should be relatively simple to understand how to calculate the value of an asset. Now, to apply this knowledge to real life situations, we need to add some examples. Assume you bought two cars, a large car and a small car, each costing $3000. You will then add up the costs for the two cars. Your profit after taxes will be the smaller of the two values because you spent less on the larger asset than you gained from the smaller one.