Every organization, regardless of its industry or business model, operates through the coordination of four fundamental resources: money, time, assets, and people. Some businesses excel at orchestrating those resources, and their top and bottom lines reflect that. Others struggle to manage these resources effectively, often leading to cash flow problems, operational inefficiencies, and missed opportunities. The good news is that this isn’t abstract theory. Financial efficiency can be both measured and improved in concrete ways.

What Is Financial Efficiency?

Financial efficiency describes a company’s ability to use its assets to generate revenue and profit, maximize shareholder value, and drive business growth. In this context, assets to consider go beyond capital and physical property, such as equipment and inventory, to also include employees (and their time), technology (especially analytics tools), and data.

Key Takeaways

  • Financial efficiency metrics are vital tools for explaining the “why” of raw numbers, making it easier for companies to act on the data.
  • Financial efficiency compares resources to outcomes to ensure that the company is using every asset effectively.
  • Efficiency can be measured by several metrics, each of which has a specific purpose.
  • Companies can use broader strategies to boost efficiencies across the organization.
  • Automation, especially when embedded with artificial intelligence (AI), can be invaluable in measuring and shaping efficiency.

Why Is Financial Efficiency Important?

Financial efficiency enables organizations to achieve their organizational goals and underpins long-term success. True efficiency yields numerous benefits, including:

  • Improving margins and pursuing growth opportunities
  • Bolstering cash flow, making it easier to pay debt and make improvements
  • Reducing risk, by slashing overspending and fostering resilience during downturns
  • Strengthening competitive advantage
  • Improving decision-making through use of thorough, accurate data
  • Increasing the confidence of all stakeholders, including investors, employees, and customers

Put another way, efficiency is essential for businesses because it directly impacts sustainability, profitability, and growth.

How Do You Measure Financial Efficiency?

Financial efficiency can be measured through a variety of efficiency ratios that calculate the relationship between two or more individual metrics and are often expressed as a percentage. By comparing different aspects of financial performance—such as operating expenses versus revenue, or marketing costs compared to how many customers were acquired—business leaders can identify areas for improvement, benchmark themselves against competitors, and make data-driven decisions about resource allocation.

Here are 12 key financial ratios that organizations use to measure and monitor their financial efficiency. Keep in mind that what’s considered “good” depends on a company’s industry, size, business model, how numbers trend over time and relative to the competition, and other factors.

1. Operating Expense Ratio (OER)

OER measures how well a company is managing the costs of running a business relative to its revenue, before accounting for taxes and interest payments. Operating expenses include inventory, payroll, rent, marketing, and maintenance. A lower OER indicates greater operational efficiency and potentially higher profitability, but what’s considered “good” varies among industries.

The formula to calculate OER is:

OER = (Operating expenses / Revenue) x 100

Consider a business that generates $1,000,000 in annual revenue and has operating expenses of $400,000. Its OER is 40% ([$400,000 / $1,000,000] x 100). In other words, the company spends 60% of its revenue on operating expenses.

2. Customer Acquisition Cost (CAC)

CAC is the total cost associated with converting a single prospect into a new, paying customer during a specific time period. CAC includes all marketing, advertising, and sales expenses incurred in the process, either in aggregate or for a specific campaign. The lower the CAC, the more efficient the business’s marketing strategies, though a higher CAC might be acceptable if it results in higher-quality, longer-term customers.

The formula to calculate CAC is:

CAC = Total marketing costs / Total customers acquired

If in one quarter a company spends $25,000 on marketing and gains 200 new customers, its CAC is $125 per customer ($25,000 / 200). If $5,000 of the total $25,000 was spent on a LinkedIn ad campaign and 25 customers were acquired as a result, its CAC for that campaign is $200 ($5,000 / 25).

3. LTV:CAC Ratio

Consider two customers, both acquired at a CAC of $125. Customer A might make a single purchase of $150 and never return, while Customer B could become a loyal patron, making repeated purchases totaling $1,000 over the course of a year. Enter the LTV:CAC ratio, which compares a customer’s lifetime value (LTV, though also CLV)—the total amount of revenue that person is expected to generate for the business during the course of their entire relationship—to their CAC. By tracking this ratio, companies can better align their efforts to acquire a new customer with the customer’s full value to the business.

Calculating the LTV:CAC ratio first requires calculating its variables: TLV and CAC (above). The formula to calculate CLV is:

LTV = Average transaction size x (Number of transactions x Retention period)

For example, if a business’s average customer spends $200 per transaction, makes one purchase per quarter, and typically remains a customer for three years, the TLV would be $2,400 ($200 x [4 x 3]). Using the $125 CAC, here is the formula to calculate the LTV:CAC ratio:

LTV:CAC ratio = LTV / CAC

The LTV:CAC ratio is 19.2 ($2,400 / $125), meaning that for every dollar spent on acquiring a customer, the business expects to generate $19.20 in revenue over the customer’s lifetime. This is generally considered an excellent ratio, well above the commonly cited minimum benchmark of $3 generated for every $1 spent acquiring the customer.

4. AR Turnover Ratio

The accounts receivable (AR) turnover ratio measures how quickly a company collects payments from customers who buy on credit during a specific time period. Given its impact on cash flow, operational efficiency, and overall financial health, this ratio is critical for businesses, investors, and financial analysts to understand.

The formula to calculate the AR turnover ratio is:

AR turnover ratio = Net credit sales / Average accounts receivable

Let’s say a bicycle manufacturer has quarterly net credit sales of $500,000. At the beginning of the quarter, AR totaled $50,000; at the end of the quarter, it was $70,000. The average of those two numbers is $60,000 ($50,000 + $70,000 / 2 = $60,000). Now, plugging both variables into the AR turnover ratio formula shows that the manufacturer collects its average AR 8.33 times per quarter (500,000 / 60,000 = 8.33)—or roughly every 11 days (90 days / 8.33 = 10.8).

Generally speaking, the higher the AR turnover ratio, the more efficient the business is at converting credit sales to cash.

5. Sales Efficiency

Sales efficiency evaluates how well a company is driving top-line growth relative to how much it’s spending on sales and marketing activities. A higher ratio demonstrates greater efficiency. The basic formula to calculate this ratio is:

Sales efficiency ratio = Revenue / Sales and marketing costs

For example, consider an auto dealership that realigned its marketing to focus on digital strategies and wants to know after the first quarter whether the shift paid off. If it earned $9,000,000 in revenue and spent $187,000 on digital marketing, its sales efficiency ratio is $48.13 ($9,000,000 / $187,000). In other words, for every $1 spent on marketing, the dealership generated $48 in revenue.

Another version of this formula starts with gross profit, which deducts the direct costs of producing the goods—aka cost of goods sold (COGS)—from revenue for a clearer picture of profitability. The formula is:

Sales efficiency = Gross profit / Sales and marketing costs

If the auto dealer has $180,000 in gross profit, its sales efficiency is 0.96 ($180,000 / $187,000), meaning for every dollar spent on marketing, it earned 96 cents in profit. Calculating both metrics provides a more comprehensive view of sales and marketing efficiency, allowing for better informed decisions.

6. Net Revenue Retention (NRR)

Subscription-based businesses, such as those that sell software as a service, track NRR, which measures the percentage of recurring revenue that comes from existing customers over a specific period of time.

The NRR calculation incorporates four variables:

  • Starting revenue: The recurring revenue at the beginning of the measurement period
  • Expansion revenue: Additional revenue from existing customers earned through upselling, cross-selling, or increased usage
  • Downgrade revenue: Revenue lost from existing customers through reduced spending (e.g., switching to a lower-tier plan)
  • Churned revenue: Revenue lost from customers that stop purchasing goods and services entirely

The formula to calculate NRR is:

NRR = (Starting revenue + Expansion revenue – Downgrade revenue – Churned revenue / Starting revenue) x 100

Let’s take an electronics retailer that sells laptop service contracts. If its starting revenue is $100,000, its expansion revenue is $20,000, its downgrade revenue is $5,000, and its churned revenue is $10,000, its NRR would be 105% ([$100,000 + $20,000 – $5,000 – $10,000 / $100,000] x 100). This shows that the company grew its revenue through existing customers by 5%, which likely indicates customer satisfaction.

7. Rule of 40

The Rule of 40 provides a quick benchmark for company performance and is helpful when evaluating different companies, especially among investors and analysts. It’s called the Rule of 40 because the number should generally be 40% or greater.

The formula to calculate the Rule of 40 is:

Rule of 40 = Growth rate percentage + Profit margin percentage

The Rule of 40 is prevalent among software companies. Consider a startup software developer that, in its second year, grew the business 50% year-over-year but saw a 5% decline in profit margin. Its score would be 45% (50% + –5%), indicating a healthy balance between growth and profitability.

8. Asset Turnover Ratio

The asset turnover ratio measures how effectively a company deploys its tangible and intangible resources—cash, AR, inventory, and intellectual property, for example—to generate sales revenue. The formula to calculate it is:

Asset turnover ratio = Net revenue / Average total assets

Let’s look at a packaged foods company that has $500,000 in net revenue and $250,000 worth of assets, on average, for a quarter. Its asset turnover ratio is $2 ($500,000/$250,000), meaning the company generates $2 of sales for every $1 of assets. A higher ratio generally indicates more efficient use of assets and operational efficiency, while a lower ratio might suggest underutilization or overcapitalization.

9. Human Capital Efficiency

Human capital efficiency assesses how effectively a company generates revenue or profit relative to the size of its workforce. The formula to calculate human capital efficiency is:

Human capital efficiency = Revenue or profit / Number of employees

Consider a manufacturer whose 500 employees produced widgets that brought in $5 million in annual revenue. Its human capital efficiency ratio would be $10,000 in revenue per employee ($5,000,000 / 500). If the manufacturer’s total expenses were $4 million, leaving a profit of $1 million, its human capital efficiency ratio is $2,000 in profit per employee ($1,000,000 / 500). While revenue per employee speaks to overall productivity, profit per employee offers a more precise measure of how efficiently the workforce contributes to the company’s bottom line.

10. Burn Multiple

The burn multiple ratio focuses on how efficiently a business uses its cash for growth. It is particularly relevant for startups and high-growth companies with recurring revenue models. The formula to calculate the burn multiple ratio is:

Burn multiple = Net burn / Net new annual recurring revenue (ARR)

Net burn represents a company’s monthly cash losses; it is derived by subtracting cash received from cash spent. If a startup has a net burn of $4 million and net new ARR of $2 million, its burn multiple is $2 ($4,000,000 / $2,000,000). That means the company is spending $2 for every $1 of new recurring revenue, which is potentially concerning, especially if sustained over time. A burn multiple of 1 or less is desirable, indicating efficient use of capital to drive growth.

11. Cash Conversion Score

While the burn multiple looks at how much a company spends to generate each dollar of ARR, the cash conversion score tracks the percentage of spending that converts into ARR (read: driving growth).

The formula to calculate the cash conversion score is:

Cash conversion score = (Net new ARR / Net burn) x 100

Using the same example as for burn multiple, the startup would have a cash conversion score of 50% ([$2,000,000 / $4,000,000] x 100). In other words, the company is converting 50% of the cash it has spent into new ARR. Put another way, for every dollar the startup spends, it generates 50 cents in new ARR. Generally speaking, a higher percentage suggests more efficient use of financial resources for growth.

12. Inventory Turnover Ratio (ITR)

ITR measures how quickly a company sells and restocks its inventory during a specific time frame. A higher ratio generally indicates faster-selling stock or, perhaps, insufficient inventory levels, while a lower ratio might suggest overstocking, obsolescence, or sluggish sales. Either way, ITR can inform development of strategies for ordering and managing inventory.

The formula to calculate ITR is:

ITR = COGS / Average inventory value

If in one year a retail bookstore has $600,000 in COGS and its average inventory value ([beginning inventory + ending inventory] / 2) is worth $200,000 in value, then its ITR is 3 ($600,000 / $200,000). This means the store sold and replaced its inventory three times during the year.

How Do You Improve Financial Efficiency?

Financial efficiency metrics can reveal opportunities for improvement. An ad buy that attracts few new customers, for example, clearly needs to be rethought. But there are also broader strategies that companies can use to improve the financial efficiency of their efforts.

1. Remove Operational Bottlenecks

Excess rules, processes, and procedures can slow down operations, chipping away at financial efficiency. Common bottlenecks include manual invoice processing and payment collection (and rework due to errors), incompatible business systems, unreliable suppliers, ailing equipment, and understaffing.

By continuously monitoring key performance indicators (KPIs) and financial ratios, companies can pinpoint inefficiencies and prioritize what to address first. While automation often provides the solution (automation is discussed later), it’s also helpful to assemble teams to map out ideal processes and procedures. Next, they can identify the issues that are in the way of the ideal and begin to eliminate the obstacles.

2. Improve Collaboration Between Departments

When departments operate in silos, inefficiencies multiply. Cooperation between departments is critical to financial efficiency. Otherwise, for example, finance teams might waste time chasing information from other departments, while sales teams might make promises without knowing if the company can afford them. To fix this, companies—often led by their finance teams—need to encourage their departments to collaborate better and work toward the same goals. A good start is to create simple, standard ways for departments to share information and report to each other. Digital tools that let teams share data quickly also go a long way in this effort.

When departments work together, it cuts down on repeated work, speeds up decision-making, and provides a clearer picture of how the business is doing as a whole, all of which can improve financial results.

3. Increase Data Visibility

When business leaders can quickly find and access data—without having to hunt through spreadsheets and emails—they can spot trends, identify potential issues before they become problems, and jump on opportunities for growth. Companies can improve their visibility by deploying integrated systems that collect and share data in real time, complete with alerts and notifications for important changes. Among the data that businesses collect:

  • Operational data, such as production rates, equipment utilization, and inventory levels
  • Customer data, such as purchase frequency, customer retention rates, and satisfaction surveys
  • Employee data, such as productivity metrics, turnover rates, and skills assessments
  • Supply chain data, such as inventory turnover, freight costs, and supplier performance
  • Market data, such as competitive pricing, promotions, and industry growth rates
  • Product data, such as return rates, defect analysis, and production costs per product
  • Compliance data, such as safety records, incident reports, and documentation for financial compliance
  • Marketing data, such as website traffic and social media engagement metrics
  • Technology/IT data, such as system downtime, cybersecurity incidents, and vulnerabilities

4. Standardize Organizational Processes

Inconsistent organization processes across departments often lead to inefficiencies, increased errors, and challenges in tracking performance. Standardization addresses these issues by establishing consistent workflows and documentation for routine activities, such as purchase approvals, expense reporting, and vendor management. It also simplifies employee training, ensures regulatory compliance, and helps identify which processes can be automated.

5. Streamline Cash Flow Management

Unpredictable cash flow is often the first domino in a chain reaction that can complicate accounts payable, vendor relations, inventory levels, and even payroll. When money going out exceeds money coming in, even profitable companies can experience a cash crunch. Systems that provide real-time visibility into accounts receivable and payable can help companies streamline their cash flow management. On the receivables side, for example, they can speed up collections by automating invoice delivery and payment reminders, or offering early payment discounts. Regular cash flow forecasting helps identify potential shortages in advance.

6. Improve Payment Terms With Suppliers

On the payables side of cash flow management, businesses can try to negotiate favorable payment terms with suppliers and time their payments strategically. This might include requesting longer payment windows, securing early payment discounts, or staggering payment schedules to avoid large simultaneous cash outflows. Consider a retailer that had 30-day payment terms with its largest supplier. Those terms crimped the company’s cash flow because it often had to pay for products before they were sold. By renegotiating to 60-day payment terms, the retailer could sell most of its products before paying the supplier, thereby improving its cash flow. Suffice it to say, building strong relationships with key suppliers can lead to more flexible terms.

7. Assess High-Interest Debts

Borrowing money can give businesses valuable leeway to take advantage of growth opportunities. But high-interest debt can strain cash flow, rob money from innovation efforts, and impact a business’s use of investor funds.

The best strategy is for businesses to avoid high-interest loans in the first place , but that isn’t always possible for startups with limited credit history or for firms facing emergencies. Still, experts caution against loans that carry prepayment penalties or variable interest rates. The goal is to monitor high-interest loans and either renegotiate the rate, refinance the loan as soon as possible, or prioritize its repayment when excess cash is available.

8. Develop a Financial Forecast

Financial forecasting helps businesses anticipate future financial needs, challenges, and growth opportunities by analyzing historical data, market trends, and business goals. This allows them to proactively plan for and mitigate risks, such as those caused by seasonal fluctuations, economic changes, and resource requirements, among other factors. Forecasts should be updated regularly as new information becomes available.

For example, suppose a manufacturer’s forecast points to a third-quarter cash flow issue. With the forecast in hand, the company could negotiate extended payment terms with its suppliers or offer early payment discounts to customers. Doing so could eliminate the need for a short-term loan and preserve smooth cash flow.

9. Automate Manual Tasks

Manual processes drain resources and increase the risk of errors, especially in routine financial tasks, such as data entry, invoice processing, and month-end financial closes. Whether through standalone solutions or features embedded in existing business systems, modern automation tools can complete these tasks in minutes, rather than hours or days. Beyond improving the efficiency and accuracy of individual processes, automation also boosts overall financial efficiency by allowing finance teams to shift their focus from repetitive administrative work to strategic initiatives that impart a greater impact on the bottom line.

10. Empower the Organization With Technology

Companies that want to boost their financial efficiency continue to turn to technology for assistance. For example:

  • Cloud-based financial systems allow teams to access and analyze real-time data from anywhere, improving accuracy while providing real-time visibility into cash flow and spending.
  • Enterprise resource planning solutions unite financial information from across departments in a common database so that everyone is able to work with the same information.
  • Advanced analytics tools turn raw financial data into actionable insights, helping organizations identify cost-saving opportunities and optimize resource allocation.
  • Artificial intelligence (AI) spots trends and anomalies in financial data that humans might miss, while predicting future patterns to improve forecasting accuracy. Emerging generative AI capabilities can also assist with financial analysis, report writing, and scenario planning.
  • Robotic process automation takes over routine financial tasks, such as invoice processing, payment reconciliation, and compliance reporting, freeing up staff for more strategic work.

Optimize Financial Processes With Software

Manual planning and budgeting processes can undermine even the best efforts to achieve financial efficiency. NetSuite Planning and Budgeting lessens the need for manual work by automating companywide planning and budgeting processes. Through the use of prebuilt workflows and templates, it also reduces planning cycle times and eliminates calculation errors.

In addition, NetSuite Planning and Budgeting automatically tracks and analyzes key financial ratios and KPIs, including operational expense ratios, accounts receivable turnover, and cash conversion. Built-in AI capabilities continuously monitor these metrics to identify trends, anomalies, and hidden correlations; this helps organizations spot opportunities and potential issues before they negatively impact the business. AI also handles time-consuming tasks, including data entry and formula maintenance, while providing sophisticated scenario-modeling and predictive planning capabilities.

Financial efficiency isn’t just about cutting costs or maximizing profits—it’s about making the most of every dollar, hour, and resource a business has at its disposal. By measuring and monitoring the right metrics, implementing proven strategies, and relying on modern technology, organizations can continue to refine their operations, ensure a steady cash flow, and adapt to changing market conditions.

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Financial Efficiency FAQs

How is financial efficiency analyzed?

Financial efficiency can be analyzed by tracking metrics that assess how well a company is using its resources to generate revenue, manage costs, and maintain profitability. For example, by comparing operational expenses to revenue, businesses can determine how well they’re managing the costs of running the business. If it’s too high, the business can cut costs or seek additional revenue to improve its efficiency.

What is a good efficiency percentage?

A “good” efficiency percentage depends on the specific metric being evaluated, the industry in question, a company’s size and business model, and more. While absolute values are important, a good efficiency percentage is one that shows improvement over time and compares favorably to that of industry peers and competitors.

What’s the difference between business efficiency and effectiveness?

Business efficiency refers to the way things are done to reduce or minimize efforts and costs, while business effectiveness relates to a company’s ability to achieve its goals. Consider an auto manufacturing firm. Efficiency describes how well the company is using its resources—capital, production capacity, labor, etc.—to manufacture the cars. Effectiveness describes whether the company is producing cars that appeal to buyers and meet current market needs.