Efficiency Ratios

What is efficiency ratio used for?

• These help stakeholders to identify if a business is being run efficiently

• It compares the business through different years

What are the 3 efficiency ratios?

• Inventory turnover ratio

• Receivable days ratio

• Payables days ratio

Theses show how a business uses its assets and how week managers are controlling stock

What is the inventory turnover equation?

Cost of sales/Cost of average stock held

What does Inventory turnover ratio tell us and how can it be improves?

This ratio tells us how many times during a year a business sold all its stock.

This can be improved by holding less stock or increasing sales.

What is the equation for payables days ratio?

Payables/Cost of sales x365

What does payables days ratio mean?

This compares the amount the business owes to its creditors to the cost of sales a business makes over a year. This gives you the amount of days it takes for the firm to pay for goods from suppliers given on credit.

What is the receivables days ratio?

Receivables/Sales revenue x365

What is meant by ‘Receivable days’?

This is the number of days the business has to wait to be paid for good supplied on credit.

Why is it best to have low receivable days?

It helps improve cash flow and working capital. If this goes up it suggest the business it not being run efficiently.