3.6

Question 1

What does stock turnover measure?

Answer 1

Measures the number of days it takes a business to sell its stock (inventory), i.e. how quickly the stock is sold and needs to be replenished.

Question 2

How to improve stock turnover?

Answer 2

• Getting rid of obsolete (outdated) inventory in order to reduce the firm’s stock levels
• Supplying a narrower range of products, thereby simplifying the amount of stocks that the firm needs to hold and control
• Implementing a just-in-time (JIT) stock control system

Question 3

What is debtor days?

Answer 3

Measures the average number of days an organization takes to collect debts from its customers (as they have bought goods and services on trade credit but have yet to pay for these).

Question 4

How to improve debtor days?

Answer 4

• Creating incentives for customers to pay by cash rather than credit, such as giving customers a discount if they pay by cash
• Shortening the credit period given to customers.
• Improved credit control by using stricter criteria for those wanting to purchase products using trade credit.

Question 5

What is creditor days?

Answer 5

Measures the average number of days an organization takes to repay its creditors (suppliers who the business has bought products from using trade credit, so have yet to pay for these).

Question 6

How to improve creditor days?

Answer 6

• Negotiating an extended credit period with the firm’s suppliers
• Looking for different suppliers who offer preferential trade credit agreements
• Using cash to pay for inventories (cost of sales), instead of over-relying on trade credit.

Question 7

What is gearing ratio?

Answer 7

• Measures the extent to which an organization is financed by external sources of finance. In other words, it is loan capital expressed as a percentage of the firm’s total capital employed.

Question 8

How to improve gearing ratio?

Answer 8

• Paying off some of the firm’s long-term liabilities (loan capital) , such as making additional mortgage payments.
• Enhancing the firm’s liquidity position by improving its stock control, giving incentives for customers to pay earlier or reducing the credit period given to customers.
• Trying to use or rely more on internal sources of finance, such as retained profits or share capital, instead of external finance

Question 9

Insolvency vs Bankruptcy

Answer 9

Insolvency is a financial state in which a person cannot meet debt payments on time. It’s not having enough money to meet your obligations. Bankruptcy is a legal process that happens when a person declares he or she can no longer pay back his or her debts to creditors.