INVENTORY TURNOVER Flashcards
Whta are efficiency ratios
These measure how effectively a business is managing their assets
What are payables (creditors) days
MEasures the number of days it takes for an organisation to pay their creditors (short term tebts)
Formula = Payables / cost of sales x 365
What are recievables (debtors) days
Measures the number of days it takes for an organisation to collect debts from customers
Formula = Recievables / sakes revenue x 365
What is inventory (stock) turnover
This ratio measures the number of times per year an organisation replaces the stock that they sell
Formula = cost of sales / inventories
What are some key points of inventory turnover
The number of times stock is turned over depends on the industry and the nature of the product.
An improving figure is one that is getting higher - This is better for cash flow
A declining or low figure compared to competitors may indicate that an organisation is holding too much stock
Stock turnover is only applicable to retailers/ wholesalers
How can you improve invetory turnover
Reduce the amount of stock held without losing sales - perhaps through introducing lean production/ JIT (Just in time)
Increase sales without changing stock levels
Sell off/ discontinue unpopular products
Is it a perfect measure
It’s not a perfect measure as the cost of sales includes all variables, not just stock, so it could be overtime payments etc (as the wages change year after year, the cost of sales will also change)
