What is a business activity of an enterprise

The stability of the financial situation and sustainable development of the company largely depend on its business activity. It can be evaluated by quantitative and qualitative criteria.

Quantitative estimates of business activity of the enterprise

In a financial sense, the business activity of a company is manifested in the turnover of its cash. In this regard, in the analysis of business activity and business efficiency, the dynamics of indicators (ratios) of turnover are used. Their importance for the enterprise is determined by a number of reasons. Firstly, the size of the company's revenue depends on the speed of turnover. Secondly, the relative value of fixed costs depends on the size of the turnover — the higher the revenue, the lower the share of costs. Thirdly, an increase in turnover at one stage entails its acceleration at another. In general, the company's solvency and profitability directly depend on how quickly investments in assets turn into real money.

There is a whole range of turnover ratios. Among them, we can distinguish asset and asset turnover ratios, fixed assets and inventories, receivables and payables.

The asset (capital) turnover ratio refers to the rate of turnover of the capital of an enterprise or how much money each unit of assets brought. It is calculated as the ratio of net revenue to average asset value (amount of capital).

The turnover Ratio of working capital shows the ratio of revenue to working capital of the enterprise. If this indicator decreases, then this signals a slowdown in the turnover of money.

The receivables turnover ratio is estimated by the ratio of revenue to average debt. It reflects how many times the funds invested in settlements with consumers turned around. A high value indicates a company’s quick payment of bills.

The turnover on accounts receivable should be compared with the similar - on accounts payable. The last coefficient reflects the expansion (decrease) of commercial loans that were provided to the company. Its growth means that the rate of payment for purchases by an enterprise is growing, a decrease indicates an increase in credit acquisitions.

The inventory turnover ratio reflects the number of revolutions of stocks of the enterprise. Its decline indicates an increase in work in progress or a fall in demand for products. The higher the indicator of inventory turnover, the more stable the financial situation of the enterprise.

It is calculated as the ratio of the cost of production to the value of stocks.

The turnover ratio of fixed assets is also called return on assets. It displays the ratio of net revenue to the value of fixed assets. Based on this coefficient, we can judge the efficiency of use of fixed assets.

A quantitative assessment of business activity may include an analysis of not only relative, but also absolute indicators. The latter include, in particular, the volume of capital, products sold and profit, as well as their dynamics.