7.2g Ratios - Efficiency Flashcards
What do financial efficiency ratios assess?
How effectively a business is managing its assets
Payable days (creditor days) formula
Payable days = (payables ÷ cost of sales) x 365
What does payable days tell us?
How many days it takes a business to pay its creditors
Is lower or higher better for payable days?
Higher
What does a high payable days figure suggest?
Liquidity problems
What do you need to look out for in payable days?
Window-dressing
Receivable days (debtor days) formula
Receivable days = (receivables ÷ revenue) x 365
What does receivable days tell us?
How many days it takes a debtor to pay a company
What do receivable days need to take into account?
Terms and conditions of sale
What do you need to look out for in receivable days?
Comparisons vs competitors
Inventory (stock) turnover formula
Inventory turnover = cost of sales ÷ average stock held
365 divided by answer
What is the unit for inventory turnover?
‘Times’
Is lower or higher better for inventory turnover?
Higher
What does a low inventory turnover suggest?
Problems with stock control
Issues to consider with inventory turnover
- Stock turnover varies from industry to industry
- Holding more stock may improve customer service and allow the business to meet demand
How do you improve stock turnover?
- Dispose of slow-moving stocks
- Lean production
- Negotiate with suppliers
What does aged receivables analysis do?
Lists unpaid accounts in order of how long their have been unpaid
What does inventory turnover show?
How many times during the year the business sold all its stock
What does aged stock analysis do?
Makes sure that old stock gets sold before it becomes obsolete by listing stock in age order
