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Business > 3.6 > Flashcards

3.6 Flashcards

1
Q

What do efficiency ratios measure?

A

How a firm uses assets and liabilities to generate sales and maximize profits

Efficiency ratios provide insights into operational efficiency.

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2
Q

What does stock turnover measure?

A

How well a firm converts its stocks into sales

Stock turnover is calculated as Cost of Goods Sold divided by Average Stock.

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3
Q

What is the ideal trend for stock turnover ratios?

A

Higher is better; firms aim for high/increasing ratios

More stock sold leads to more profit generated.

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4
Q

What does a lower stock turnover ratio indicate?

A

Selling stock quickly and less likelihood of holding obsolete stock

Low stock turnover might be good for some businesses and bad for others.

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5
Q

What are some methods to improve stock turnover?

A
  • Hold less stock
  • Reduce cost of sales
  • Reorder from suppliers more regularly
  • Implement just-in-time stock management
  • Dispose of obsolete stock
  • Reduce product range
  • Seek lower-cost suppliers
  • Purchase in bulk
  • Reduce storage costs
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6
Q

What does gearing illustrate?

A

The long-term financial structure of a business

It shows the balance of non-current liabilities to shareholder capital used to fund the firm.

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7
Q

What is considered a good gearing ratio?

A

25% - 50% is good

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8
Q

What does a gearing ratio of less than 50% indicate?

A

The business is low-geared, largely funded by shareholder capital

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9
Q

What does a gearing ratio greater than 50% indicate?

A

The firm is high-geared, largely funded by loan capital

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10
Q

Fill in the blank: Stock turnover is an indicator of how efficiently a business converts _______ to sales.

A

stock

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11
Q

How many days does creditor days measure?

A

How many days it takes to pay debts

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12
Q

What is the significance of debtor days?

A

It indicates how many days it takes to collect money owed

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13
Q

What does a higher gearing ratio indicate?

A

More dependent on long-term borrowings

A higher gearing ratio implies increased financial risk due to reliance on debt.

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14
Q

What financial risk is associated with high gearing?

A

Cash flow & investment constraints

High gearing can limit a firm’s ability to invest in new projects or growth opportunities.

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15
Q

When is high gearing less problematic?

A

When interest rates are low and large, profitable businesses can meet debt obligations

Low interest rates reduce the burden of debt repayments.

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16
Q

What happens to businesses when interest rates rise?

A

Cost of repaying loans rises, putting strain on finances

Rising interest rates can reduce profitability as more revenue is allocated to debt repayments.

17
Q

What are the options for improving gearing ratio?

A
  • Reduce long-term borrowing
  • Raise equity capital
  • Retain profits instead of distributing as dividends

Improving the gearing ratio can enhance financial stability.

18
Q

What investor perception is associated with high gearing?

A

It is associated with financial risk, potentially leading to lower share prices

High gearing can make it difficult to attract new investors.

19
Q

What should firms aim for regarding Debtor Days?

A

Aim for low or reducing ratio (30-60 days)

Prompt collection of debts improves cash flow.

20
Q

What can be a consequence of not collecting debts on time?

A

Lack of working capital

If debts are unpaid, a firm may face cash flow issues affecting operations.

21
Q

What methods can be used to reduce Debtor Days?

A
  • Refuse to provide further goods unless debts are paid
  • Threaten legal action
  • Suspend orders until payments are received

These methods should be used cautiously to maintain customer relationships.

22
Q

True or False: High gearing can lead to attractive returns if profitability is high.

A

True

High profitability can offset the risks associated with high gearing.

23
Q

What does a high credit period indicate for a business?

A

It suggests liquidity problems and that customers are seeking better credit terms

A high credit period may signal that the business is not competitive and customers are looking for alternative suppliers.

24
Q

What are creditor days?

A

Average number of days it takes a firm to pay its creditors

Creditor Days = (365 / Cost of Goods Sold)

25
Q

What is the ideal business aim for creditor days?

A

30-60 days

Aiming for this range indicates effective negotiation skills.

26
Q

True or False: Delaying payments to suppliers can improve cash flow.

A

True

This practice can help free up cash for short-term uses.

27
Q

What can happen if a business takes too long to pay its creditors?

A

It may face financial penalties and harm cash flow

Delayed payments can lead to strained relationships with suppliers.

28
Q

Name one method to improve the credit days ratio.

A

Develop close relationships with suppliers

Strong relationships can facilitate better negotiation for payment terms.

29
Q

What is insolvency?

A

Inability of a firm to pay debts due to lack of funds

This may occur when there is not enough cash in the bank account.

30
Q

What is balance sheet insolvency?

A

When liabilities exceed assets

This indicates that the business cannot cover its debts with its assets.

31
Q

What is bankruptcy?

A

A formal legal declaration of an individual’s inability to settle debts

Often seen as the outcome of insolvency.

32
Q

What happens to assets in a sole trader or partnership during insolvency?

A

Assets will be sold

This is part of the process to settle outstanding debts.

33
Q

What does liquidation involve?

A

Selling of firm assets to settle outstanding debts

It is a process to dissolve a company.

34
Q

What is administration in the context of insolvency?

A

A process that protects a firm while attempts are made to settle debts

It allows the business to continue trading during financial difficulties.

35
Q

What is the working capital cycle?

A

The period between cash payments for costs of production and cash receipts from customers

Managing this cycle carefully is crucial to avoid insolvency issues.

36
Q

Fill in the blank: Insolvency can lead to __________ for sole traders and partnerships.

A

bankruptcy

This is a legal outcome of being unable to pay debts.

37
Q

What can a successful administration allow a company to do?

A

Continue trading

If administration fails, the company may face liquidation.

38
Q

What are insolvency issues?

A

Challenges faced by a company when it cannot meet its financial obligations.

Insolvency issues can lead to bankruptcy if not addressed.

Business (14 decks)

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