Efficiency ratios Flashcards
What is an efficiency ratio ?
Measures how many £ pf sales a business generated from assets employed
What is asset turnover ?
Measures how many times you can cover the cost of an asset / Higher figure = good :)
What is the equation for asset turnover ?
Revenue / Non current assets = X times
What are the causes of a low asset turnover figure ?
Poor promotion or pricing
High cost of stock
Non competitive prices
Poor machinery / old machines
How can we increase asset turnover ?
Increase budget on marketing the product
Better trained staff to increase output
Purchasing economies of scale
Go to a new market or go multinational
What is stock turnover ?
Measures the number of times in a year that a business sells and restocks
What is the formula for Stock turnover ?
Cost of stock ( cost of sales ) / Average stock = X times per year
How can stock turnover be improved ?
Tightening of stock control
Improved handling procedures
Implement Just in time ( JIT )
What are some examples of costs of stock out ?
Labour wasted
Upset customers
Damaged reputation
Loss of bulk buying discounts
How can we increase sales without raising stock levels ?
Extend opening hours
Improving service / efficiency
Selective advertising ( SEGMETATION )
What are debtor days ?
Measures the number of days it takes a business to collect any money owed by the customers
What is the formula for debtor days ?
Trade receivables / Revenue X 365
What may an increase in debtor days may be due to ?
Weakened credit control
Changes in company settlement policy
Customers demanding longer credit period
How can debtor days be improved ?
Offer shorter credit period
Check credit worthiness
Quickly chase late payments
Offer discount for prompt payments
What is creditor days ?
Measures the number of days it takes a business to pay any money owed by its suppliers
