F5 ratios: measuring efficiency Flashcards
why are efficiency ratios used by businesses?
they measure how efficiently a business manages its finances and uses its inventory
trade receivable days=
trade receivables/credit sales x 365
what are trade receivable days?
amount of days it takes debtors to pay for goods they have purchased on credit
what impact might a high number of trade receivable days have on a business?
indicates a business is not controlling its debt collection, which could result in cash flow problems
trade payable days=
trade payable/ credit purchases x 365
what does trade payable days measure?
how many days it takes a business to pay for goods and services bought on credit.
how are the trade receivables and trade payables comparable to help the business?
trade payables are compared to trade receivables as business will want to receive the money it is owed quicker than paying money it owes, this will have a positive impact on its cash flow.
what are the average credit terms a business provides to other businesses?
30 days
inventory turnover=
average inventory/ COGS x365
average inventory=
(opening inventory + closing inventory) / 2
what does it mean if a business has an inventory turnover of 10 days?
The business holds inventory (stock) for an average of 10 days before it is sold
what does inventory turnover measure?
average number of days a business holds stock before it is sold
why will the inventory turnover ratio vary? give an example
because it depends on the industry and trends.
-a food business will have a low ratio because it goes out of date quickly
- a luxury car company may have a much higher ratio
what does a high number of inventory turnover days suggest?
the business has money tied up in stock, takes much longer to sell their inventory.
