Financial indicators Flashcards
One strategy to improve the Inventory turnover rate
One key strategy for improving inventory turnover is to hold less inventory. If inventory held decreases then the number of days it takes to turnover inventory will fall and less cash is tied up in inventory and that cash can be used for other expenditure. However, less inventory could mean that customers have limited choice/inventory may not be available for them to purchase which may cause a decrease in Sales.
Two strategies to improve management of accounts receivable
Strategy 1: Prompt invoicing – if invoices are sent promptly less time passes between the sale and when invoice is received – this could reduce the time it takes for accounts to be settled.
Strategy 2: Send reminder notices – some accounts receivable may forget their account is due (or overdue) and so sending a reminder notice may encourage those accounts to be settled sooner.
A positive and negative factor associated with a increasing inventory turnover rate
Positive factor: An increase in sales has occurred and as a result the business has Purchased more inventory as a means of dealing with this increased volume of sales. This is A positive for the business as more revenue is being generated.
Negative factor: An increase in the cost price of stock but not an increase in the Selling price – a reduced mark-up on cost. The business have decided not to pass on the increased cost to customers and so has a rising COGS with no change to sales volume which is a negative as profit is lower.
Non financial information that the business could use to assess the inventory turnover.
Non-Financial Information:
The number of purchase returns/number of customer complaints/number of sales returns.
Explanation:
Ethan could assess the Inventory Turnover by looking at the number of times he has had to return inventory to his suppliers as this will provide him with information about the quality of his inventory to ensure that he is meeting the demands of his customers.
