3.6 Efficiency Ratio Analysis

Stock turnover ratio

Rate at which a manufacturing business uses its stock of resources in a given time period

Strategies to improve stock turnover ratio

• Supplying a narrower range of goods

• Selling obselete stock

• Just-in-time stock control

Obselete

Out-of-date

Debtors

Money a business collects at a later time from its customers (when selling goods on credit)

Strategies to improve debtor days

• Having customers pay in cash

• Shortening the credit period

• Threatening legal action of imposing a penalty

Strategies to improve creditor days

• Negotiating longer credit periods

• Good stock control system

• Looking for different suppliers

Gearing ratio

A measure of how much a business’s capital employed is financed by long-term debt

Strategies to improve gearing ratio

• Paying off liabilities

• Increasing retained profit

• Selling more shares

Insolvency

Temporary disturbance in the financial well-being of an individual/business organisation

List the 2 types of insolvency

• Voluntary administration

• Liquidation (closing the company)

Bankruptcy

Legal status of an individual/business being unable to pay debts, normally permanent

List the 2 types of bankruptcy

• Reorganisation bankruptcy (court engages in restructuring of bills)

• Liquidation bankruptcy (court sells all the assets and pays of any creditors)