Efficiency Ratios

Question 1

Working Capital Definition

Answer 1

Capital available for conducting the day-to-day operations of an organisation.

Current assets - Current Liabilities.

Question 2

Inventory Days Calculation

Answer 2

Inventory / Cost of Sales x 365

• How many days it takes from receiving inventory to when it is sold.

Question 3

Accounts receivable collection period

Answer 3

Trade receivables / Credit Sales x 365

• How many days from point of sale to receive the revenue.

Good to have short trade receivables days because quicker cash flow and therefore less likely to run out of cash as long as you’re making sales. However, short trade receivables may put customers off as they have to pay it back quickly.

Question 4

Accounts payable payment period and benefits and drawbacks.

Answer 4

Trade payables / Credit purchases** x 365
**If not then use Cost of Sales.

• How many days from point of purchase until you pay your suppliers.

Good to have long credit period so you can delay payments, but not too long as you want to keep a good relationships with suppliers.