Business Efficiency Ratios: Inventory Turnover and Receivable Days

Flashcards covering Inventory Turnover and Receivable Days, their indicators, and implications for businesses.

How can businesses assess their Inventory Turnover ratio effectively?

By comparing it to previous years, competitors, or the industry average.

For what type of businesses is a high inventory turnover typically expected?

Businesses dealing with perishable items or those with constantly changing trends, such as retail (e.g., Zara).

What is a positive sign that a high inventory turnover can indicate for a business?

It often indicates that the business is selling its stock quickly.

What is a potential negative implication of a very high inventory turnover?

The business might be running out of stock and not meeting customer needs.

What could a low inventory turnover indicate for a business?

It could mean the business is experiencing poor sales and therefore holding less stock.

How does a Just-In-Time (JIT) inventory system typically affect a business's stock turnover?

JIT systems usually lead to a high stock turnover as less stock is held.

What type of financial ratio is 'Receivable Days'?

It is an efficiency ratio that shows how quickly debts are turned into cash.

What does the 'Receivable Days' ratio measure?

It measures how quickly a business receives money that is owed to them.

Why might larger companies, especially MNCs, take longer to pay their debts?

They tend to have more power.

What is the usual goal for a business regarding its 'Receivable Days' and why?

A business usually wants its receivable days to be as low as possible to improve cash flow and help pay for outgoings.

Under what circumstances might a business intentionally increase its 'Receivable Days'?

As part of a promotional campaign or to offer improved customer service, allowing customers longer to pay to attract them.