Average operating assets definition
/What are Average Operating Assets?
Average operating assets refers to the normal amount of those assets needed to conduct the ongoing operations of a business. This figure can be included in the operating assets ratio, which compares the proportion of these assets to the total amount of assets that a business owns. A high ratio indicates that company management is making good use of its assets. The average operating assets figure can also be compared to annual sales on a trend line. This information reveals whether a business is becoming more or less efficient in its use of assets to generate sales.
How to Calculate Average Operating Assets
The assets normally included in the calculation of average operating assets are cash, prepaid expenses, accounts receivable, inventory, and fixed assets. To find the average, follow these steps:
Aggregate the balances in these accounts for the end of the preceding period.
Aggregate the balances in these accounts for the end of the current period.
Add the two totals together and then divide by two.
Understanding Average Operating Assets
Generally, a low level of average operating assets in comparison to sales is considered to be a good use of company resources. However, there are several situations in which this may not be the case. They are as follows:
New business model. A company may decide to move into a new product line or market niche that requires a greater asset investment. If so, this calls for a deliberate increase in assets.
Higher customer service level. When part of the business strategy is to provide a higher level of customer service, this can call for a greater asset investment. In essence, the strategy mandates more assets in order to lower customer turnover and increase sales per customer.