Efficiency Ratios

What are efficiency ratios?

show managers and shareholders how well the business is using its resources and how well the firm is doing in controlling costs and cash flow

What are the four different efficiency ratios?

asset turnover ratio
inventory turnover ratio
payable days ratio
receivable days ratio

What does the asset turnover ratio show?

how much sales revenue a business is making from every pounds worth of its assets

What do non current assets do to a business?

helps it run more efficiently and makes a lot of sales

What should a firm with a lot of non-current assets should have?

large turnover

What could a low asset turnover ratio suggest?

the business isn't using its non-current efficiently so its assets are not generating as much turnover as they should and that the firm has too many current assets

How can businesses improve their asset turnover?

getting rid of under used non current assets
holding less stock

What is the equation for asset turnover ratio?

sales revenue / assets

What is inventory turnover ratio?

it examines how quickly stock is being turned over in a year and is dependent on the industry

What does inventory turnover ratio show?

how many times a year the business sells all its stock

How can the inventory turnover ratio be improved?

holding less stock
increasing sales

What is aged stock analysis?

lets managers make sure that old stock gets sold before it becomes obsolete and unsaleable and it lists all stock in age order so the manager can discount old stock and cut down orders for slow selling stock

What is the equation for the inventory turnover ratio?

cost of sales / inventories

What is receivables days ratio?

the number of days that the business has to wait to be paid for goods its supplies on credit by customers

What will some firms seek to do with the receivables days ratio?

lengthen this figure by offering good credit terms to attract customers

Should receivables come before or after payables?

before

Is it better to have high or low receivable days?

low

Why is it best to have low receivable days?

it helps with cash flow and working capital

What is aged receivables analysis?

lets managers control receivable days and unpaid accounts are listed in order of how long they've been unpaid

What is the equation for receivables days ratio?

receivables / sales x 365

What is payables days ratio?

the number of days the firm takes to pay for goods ti buys on credit from suppliers

What is the equation for payables days ratio?

payables / cost of sales x 365