3.5 HL Flashcards
what is the stock turn over ratio?
measures how quickly and often the stock of a firm is sold and replaced over a period of time. It could be calculated as the number of times the stock is sold or the number of days it takes to sell the stock .
why do we need to be careful in analyzing the type of business when looking at stock turn over ratio?
Bacause the type of business affects the amount of stock-
Some businesses have to hold large quantities and value of stock to meet customer needs. They may have to stock a wide range of product types, brands, sizes, etc.
Stock levels can vary during the year, often caused by seasonal demand
Some products and industries necessarily have very high levels of stock turnover. (i.e. Fast-food outlets turnover their stocks over several times each week, let alone 8-10 times per year! And distributor of industrial products might aim to turn stocks over 10—20 times per year)
how can we improve the stock turn over ratio?
Sell-off or dispose of slow-moving or obsolete stock
Introduce innovative production techniques to reduce stock holdings
Negotiate sale or return arrangements with suppliers (just-in-time) JTI
can you expand on ‘sell-off or dispose of slow moving or obsolete stock’ as a was to improve the stock turn over ratio?
This will reduce the firms’ level of stock but this can also generate loss of sales revenue that the items (stock) would have generated
can you expand on ‘indroduce innovative production techniques to reduce stock holding’ as a was to improve the stock turn over ratio?
This will generate less stock but can be very costly
can you expand on ‘negotiate sale or return arrangements with suppliers’ as a was to improve the stock turn over ratio?
With this the stock is only paid for when a customer buys it (i.e. raw material are ordered when they are needed)
what is the debtors day ratio?
this ratio is also know as “debt collection period” and it measures the number of days it takes a firm to collect its debt from customers (debtors) who purchased merchandise on credit.
how can we improve the debtors day ratio?
Provide discounts
stop transactions with overdue payers
Imposed penalties for late payers
take legal action
can you expand on’ provide discounts’ as a way to improve the debtors day ratio?
This is aimed for customers to pay their debts earlier. However, the firm will receive less income from those customers
can you expand on’ stop transactions with overdue payers’ as a way to improve the debtors day ratio?
Until they pay their debts. Nevertheless, this won’t guaranty the payment
can you expand on’ impose penalties for late payers’ as a way to improve the debtors day ratio?
This could be in the form of fines but might affect loyal customers and my turn the away
can you expand on’ take legal action’ as a way to improve the debtors day ratio?
Take customers to court might affect the reputation of the business dealing with customers
what is the creditor day ratio?
this ratio measures the number of days a firm takes to pay its creditors. Assessing how quickly a firm is able to pay its suppliers, normally within a year.
what are some ways to improve the creditors day ratio?
Good relationship with creditors
effective credit controle
can you expand on ‘good relationship with creditors’ as a way to improve the credits ratio?
This might enable the firm to negotiate extended credit period. However, not all the suppliers will agree to do this and that might affect the firm in the future.
