7.2g - Ratios (Efficiency) Flashcards
What do financial efficiency ratios assess?
How effectively a business is managing its assets
Payable days (creditor days) formula
(Payables / cost of sales) X 365
Payable days definition
How many days a business takes to pay its creditors
What does a high payable days figure suggest?
Liquidity problems
Receivable days (debtor days) formula
(Receivables / revenue) X 365
Receivable days definition
How many days it takes a debtor to pay a business
Aged receivables analysis definition
When unpaid accounts are listed in order of how long they have been unpaid so that they can be targeted for repayment
Inventory turnover formula
Cost of sales / average stock held
Inventory turnover definition
How many times during the year the business sold all of its stock
Is a lower or high inventory turnover figure better?
Higher
Aged stock analysis definition
When managers make sure old stock gets sold before it becomes obsolete by listing stock in age order
What does a low inventory turnover figure suggest?
Problems with stock control
How can a business improve stock turnover?
- Sell-off or dispose of slow-moving or obsolete stocks
- Introduce lean production
- Reduce stock-holding requirements
- Negotiate with suppliers
