Measuring business performance

Question 1

Internal control

Answer 1

Process and procedures established to protect an organisation from theft or fraud

Question 2

Types of internal control

Answer 2

• Separation of duties
• Secure banking facilities
• Background/police checks on staff

Question 3

Inventory turnover (ITO)

Answer 3

Measures the average number of days it takes for inventory to convert into sales

Question 4

Assessing ITO

Answer 4

Fast ITO = low number of days, improves liquidity of business

Too fast ITO = selling price is too low or risk of not meeting demand

Slow ITO = high number of days, low liquidity (not quickly converting inventory into sales)

Question 5

Accounts payable turnover (APTO)

Answer 5

Measures the average number of days it takes the business to pay its credit suppliers

Question 6

Assessing APTO

Answer 6

Fast APTO is represented by low number of days

Slow APTO is represented by high number of days

Question 7

Accounts receivable turnover (ARTO)

Answer 7

Measures the average number of days it takes credit customers to repay amounts owing

Question 8

Assessing ARTO

Answer 8

Fast ARTO is represented by low number of days

Slow ARTO is represented by high number of days

Question 9

Non-financial information

Answer 9

Information used for decision-making that cannot be found in the financial statements.

Question 10

Using non-financial indicators to assess a firm’s relationship with their customers

Answer 10

• Customer satisfaction survey results
• Number of sales returns
• Number of customer complaints

Question 11

Using non-financial indicators to assess a firm’s relationship with its employees

Answer 11

• Employee satisfaction survey results
• Level of staff turnover
• Level of staff absenteeism

Question 12

Using non-financial indicators to assess firm’s inventory

Answer 12

• Number of sales returns
• Number of purchases returns
• Number of customer complaints

Question 13

Using non-financial indicators to assess the economy

Answer 13

• Unemployment rate
• Interest rates
• Inflation rates

Question 14

Benefits of offering credit sales

Answer 14

• Create strong and lasting relationships with customers
• Increase sales and net profit

Question 14

Strategies to improve inventory

Answer 14

• Monitor inventory mix
• Encourage customers to purchase complementary products
• Rotate inventory
• Assess individual lines to identify slow vs fast moving inventory
• Set minimum and maximum levels of inventory
• Maintain up-to-date inventory
• Advertise the business and it’s products
• Employ an inventory manager

Question 15

Strategies for improving accounts receivable

Answer 15

• Develop strong relationships with customers
• Promptly issue invoices
• Offer discounts for early payment
• Credit check every customer before offering credit
• Send reminder letters, emails, phone calls
• Threaten legal action
• Threaten to take away credit facilities

Question 16

Benefits of making credit purchases

Answer 16

• Potentially re-sell inventory before payment is due
• Earn discount revenue
• Leaves cash in business which can be used elsewhere

Question 17

Strategies for improving accounts payable

Answer 17

• Develop strong relationships with suppliers
• Pay within credit terms
• Employ someone to manage all accounts payable transactions
• Communicate often and truthfully