3.6 Finance and Accounts Flashcards
is the stock turnover ratio an avarage
yes, because sales and therfore stock turnover often varies over the course of a year
this can be due to seasonal changes like climate changes or holiday periods.
stock turnover ratio (inventor ratio)
measures the number of times, on average, that a company sells and therefore replenishes its stock within a period of time, usually a year
the more frequently the stock is “turned over”
the more efficient the business is
stock turnover ratio formula ( number of times)
cost of sales/ average stock
stock turnover ( number of days)
(average stock/ cost of sales) x 365
average stock formula
(opening stock + closing stock)/2
what can a low inventory ratio suggest
slow sales due to poor quality or range of goods
inadequate promotion
overstocking
factors related to sales
debtors
a person or business that has bought products on credit from another business, but has not yet paid for their products
what happens if a business takes to long to recievemoney from debtors
there could be cashflow problems
debtor days ratio
measures the average number of days it takes the business to collect its debts. typically, credit periods can be 30, 60, 90 days
the shorter the debtor days
the better it is for the business
creditor days ratio
indicator of the average number of days it takes a business to pay its debts.
creditor days ratio
creditors/cost of sales x 365
the longer the creditor days
the better it is for the business
the business does not have to spend cash in the working capital cycle as quickly
reduces the pressure of the working capital
gearing ratio
a measure of how much of a business capotal employed is finances by long-term debt
the higher the gearing ratio
the more of the business operations are funded by long-term debt.
what gearing ratios are low hugh and normal
25%= low
50%= normal
above 50%= hugh
gearing ratio formula
(non- current liabilities/ capital employed) x 100
capital employed formula
capital employed= non- current liabilities + equity
strategies to reduce stock turnover ratio
- supplying a narrower range of goods
- selling obselete stock, stocking goods in high demand
- just in time stock control
supplying a narrower range of goods benefits and limitations
benefit: simplifies stock, increases the control over stock and can reduce stock quntities
limitation: simplifying the product portfolio and offering reduced choice to customers may negativley affect sales revenues if the fewer items are sold as a result
selling obselete stock, stocking goods in high demand benefits and limitations
benefits- reducing unpopular stock items can reduce stocks. selling goods in high deman will increase sales of stocks. this can also save on storage costs.
limitation: simplifying the product portfolio and offering reduced choice to customers may negativley affect sales revenues if the fewer items are sold as a resul
just in time stock control benefits and stock control
benefits- stock could be ordered only when needed for the production process. ensures there is no excess
limitations- delays in supply chains, cause business stock to run out, reducing sales, revenues and causing customer disatisfaction
strategies to improve debtor days
having customers pay in cash- offer discount for cash payments, charge interest on credit payments, reduce amount of outstanding purchases on credit
shortening the credit period- debtors paying sooner
improving credit control- business could only givcredit trade to certain customers + stricter criteria
refusing to do business with costumers who pay late
threatening legal action or imposing penalty
limitations of strategies that reduce debtor days
These strategies may upset some customers leading to a decline in sales revenue. A business needs to balance its own need to reduce debtors with its customers’ needs for flexible payment options.
strategies to improve creditor days
negotiating longer credit periods
good stock control system
looking for different suppliers
benefits and limitations of negotiating longer credit periods
benefits: businesses can develop close relationships with their suppliers (creditors), helping them negotiate longer credit periods
asking for longer credit periods can threaten relationships with suppliers, who themselves need to payment for their own working capital cycles
good stock control system ( creditor days) benefits and limitations
benefits: stock could be ordered ony when needed
limitations- delay in stock, reducong sales, disatisfaction
looking for different supply chains benefits and limitations
- working with different suppliers might help businesses get better credit terms and might extend credit periods
- businesses will havev to establish new relationships with suppliers. these may not have the trust needed to extend credit periods
strategies to improve gearing ratio
- paying off liabilities: business can pay their long term liabilities to reduce the gearing rayio, but paying off long term liabilities will mean less cash for daily operations which can reduce sales revenue
- increasing retained profit- can be achieved through the cost minimisation and increasing revenue. this increases the value of the denominator in the formula, therby decreasing the gearing ratio, however this could mean reducing dividens for shareholders
- selling more shares, will increase the denominator and consequently decrease the gearing ratio.. the value of equity will increase however selling more shares will dilute ownership and reduce dividens for shareholders
insolvency
situation were an individual or a business in not able to pay debts.
happens when the working capital cycle does not funtion effectivley
how will insolvency occur
- debtor days are too long: customers take a long time to pay for products, which reduces the cash flow in the business
- loss of sales revenue: this can occur due to internal factors such as poor quaity products or hugh labour turnover, or external factors like increased copetition or poor economic conditions
- increased cost due to internal facors or external
- legal action- business sued etc
