financial indicators Flashcards
what are financial indicators used to assess?
the owner uses information, including financial statements and other sources of data to assess the business’ performance.
After data is collected, the owner will analyse and interpret it to make well-informed decisions regarding the future of the business
what are areas the businss is assessed in?
- profitability, ability to make a profit as compared against a base such as assets, sales and owner’s equity
- liquidity, ability to repay short-term debts (current liabilities)
- efficiency, ability to manage assets and liabilities effectively
- stability, ability to meet short-term debts and continue daily operations into the future
what does the inventory turnover (ITO) measure?
- measures the average number of days it takes for a business to convert its inventory into sales (cash).
Fast ITO = low number of days
Slow ITO = high number of days
how do we know when the ITO is good or not?
how does slow/fast/too fast ITO affect the business?
we can compare it to benchmarks such as:
- industry average
- past ITO performance
- budgeted ITO performance
fast ITO improves liquidity
Too fast ITO means that the selling price is too low (risk of losing revenue and profit) or there is not enough inventory on hand (risk of not meeting demands)
Slow ITO = liquidity issues
what does the accounts payable turnover (APTO) measure?
the average number of days it takes the business to pay credit suppliers
one of the main things assess with APTO is credit terms (e.g. 2/7, n/30)
what are benchmarks for APTO?
- industry average
- past APTO performance
- budgeted APTO performance
- credit terms offered by suppliers
what does accounts receivable turnover (ARTO) measure? and what are benchmarks?
the average number of days it takes for credit customers to repay amounts owing
benchmarks:
- industry average
- past ARTO performance
- budgeted ARTO performance
- credit terms offered by business
