financial ratios- receivables, payables and liquidity

What is one potential limitation to consider when reviewing a company's accounts?

There is a possibility that accounts have been 'window dressed' by accountants.

When analyzing a business, what is a crucial aspect often overlooked by solely focusing on financial data?

Other non-financial objectives of the business, such as reputation or quality of product.

What is the primary purpose of analyzing a business's external environment?

To assess opportunities and threats, including political and legal changes.

What are two key benefits of mass customization for a business?

Can charge a higher price and differentiates the business from competitors.

Beyond differentiation, what additional competitive advantages can mass customization provide?

It can lead to lower unit costs and greater customer loyalty.

What does a liquidity ratio measure for a business, and what is an example?

It measures a business's ability to survive in the short term by comparing current assets and liabilities; an example is the current ratio.

What are two advantages of operating as a Limited (Ltd) company?

Limited liability, less takeover risk, and more privacy compared to a Public Limited Company (PLC).

What does the gearing ratio indicate about a business's financial structure?

It indicates how much a business is funded by or relies on long-term borrowing.

What types of factors does a SWOT analysis reveal for a business?

Both internal and external factors impacting a business, such as strengths, weaknesses, opportunities, and threats.

How does a SWOT analysis help a business strategically?

It helps a business set objectives and allows for comparison against competitors.

What is the main purpose of the Return on Capital Employed (ROCE) ratio?

It measures how efficiently a business uses its invested capital (equity + non-current liabilities) to generate profit.

What does the Current Ratio (liquidity) indicate?

It shows a business's ability to meet its short-term liabilities with its current assets, indicating its short-term cash flow survival ability.

What is the primary purpose of the Gearing (%) ratio?

It shows how much a business uses long-term debt (non-current liabilities) as a proportion of its total capital employed.

What does the Payable Days ratio measure?

It calculates, on average, how long it takes a business to pay its debts to suppliers.

What does the Receivable Days ratio measure?

It calculates, on average, how long it takes a business to receive payments on debts owed to it by customers.

What is the main purpose of the Inventory Turnover ratio?

It indicates how quickly a business sells its stock or inventories over a specific period (e.g., a year or a month).

What does the Gross Profit Margin (%) ratio compare?

It compares a business's gross profit to its revenue, with a higher percentage generally being more desirable.

What is the purpose of the Operating Profit Margin (%) ratio?

It compares a business's operating profit (profit before interest and tax) with its total revenue.

What does the Profit for the Year Margin (%) ratio compare?

It compares the business's net profit for the year (after all expenses, including interest) with its total revenue.

How is Gross Profit (GP) generally calculated?

Sales Revenue - Cost of Sales.

How is Operating Profit (OP) generally calculated?

Gross Profit - Operating Expenses.

How is Profit for the Year (PFTY) generally calculated based on operating profit?

Operating Profit - Interest.

What is generally considered an ideal current ratio?

Around 1.5:1.

What does a current ratio of 'SC: 1' indicate?

For every amount of current liabilities, there is an equal amount of current assets.

What might a too-high asset ratio signal negatively for a business?

It may indicate too many current assets, like inventories that aren't selling, which could be used for other purposes.

What risk does a business with low liquidity face?

It is in danger if short-term creditors, such as banks for an overdraft, demand payment quickly.

Name two ways a business can seek to improve its liquidity.

Selling assets no longer being used (turning them into cash) and moving cash balances from current accounts to high-interest bearing accounts.

What are two other strategies a business can use to improve liquidity, besides selling assets or moving cash?

Switching to long-term sources of finance and monitoring receivables to avoid bad debts.

What are the main benefits of using financial ratios for a business?

They help interpret data, make comparisons (over time and with other businesses), and aid in decision-making (e.g., setting objectives).

What are some drawbacks of using financial ratios?

They don't account for external factors (PESTLE), may not apply to all businesses (e.g., small chip shops), require consideration of reasons behind the ratios, and provide only quantitative information.

Where are 'receivables' categorized on a balance sheet?

Current assets.

How is 'receivable days' calculated?

(Receivables / Sales) x 365.

From a financial perspective, what is the desired relationship between receivable days and payable days?

Receivable days should be shorter than payable days.

What do 'payable days' indicate about a business?

How quickly a business pays its debts.

What are the potential negative consequences if a business takes too long to pay its debts?

Credit ratings may be affected, and suppliers may restrict the amount of credit.

What can be a potential benefit for a business in delaying payments to its creditors?

It helps with cash flow.

How is 'payable days' calculated?

(Payables / Cost of Sales) x 365.

What does 'liquidity' measure in a business?

A business's ability to survive in the short term, specifically its ability to meet short-term debts and day-to-day expenses.

What risk does a business face if it cannot meet its current liabilities from its current assets?

It is at risk of failure if creditors/payables demand immediate payment of debts.

What is the formula for calculating a business's liquidity ratio?

Current Assets / Current Liabilities.