BTEC Business - F5

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  • Created by: Kaicee05
  • Created on: 14-05-23 21:48

Efficiency Ratios

Efficiency ratios tend to be used to assess how well management is controlling key assets of the business, primarily stock and finances. There are three efficiency ratios:

- Trade receivable days 

- Trade payable days 

- Inventory turnover

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Trade Receivable Days

The ratio measures how long on average it takes for debtors to pay. It's expressed as anumber of days. 

Eg. If the debtors payment time is 60 days, it means it will take the debtor 60 days to pay for goods. A business with cash flow problems will try to reduce debtors payment periods.

- IF you don't know what percentage of sales were made on credit, it is acceptable to use the sales figure as given in the statement of comprehensive income. 

Trade recievable days vary. Businesses to businesses may have longer payment terms. Different options may be given to customers depending on reliability. 

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Trade Payable Days

This ratio measures, on average, how long it takes the firm to pay for goods on credit. It is expressed as a number of days.

Eg. A business has trade payable days of 30 days meaning there is a one month gap between the business buying the good and paying for it. A business with cash flow problems will try to lengthen it's trade payable days. 

- IF you don't know what percentages of purchases were made on credit, it is acceptable to use the purchases figure as shown on the the statement of comprehensive income. 

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Inventory Turnover

This ratio measures the amount of time an item of stock is held by the business and is expressed in days. 

Eg. If a business has an inventory turnover of 7, it means on average, each item of stock is held in the business for one week. 

The rate of inventory turnover is dependent upon the nature of the firm.

Eg. A florist may have a much lower inventory turnover then a fashion store. However if the rate of inventory turnover appears high for the nature of the product, it could go out of date. 

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