Efficiency

• What is efficiency?

  Financial efficiency ratios analyse how effectively a business is managing its assets
• 3 commonly used efficiency ratios

  1. Inventory Turnover
  2. Payable Days
  3. Receivables Days
• Inventory Turnover 


  Measures how often each year a business sells and replaces its inventory
• Payable Days


  Measures the The average length of time taken by a business to pay amounts it owes
• Receivable Days

  Measures the average length of time taken by customers to pay amounts owed
• inventory turnover calculation

  cost of sales / inventories
• how can a business improve its inventory turnover?

  1. sell-off or dispose of slow-moving inventory
  2. introduce lean production techniques to reduce amounts of inventory held
  3. rationalise the product range made of sold
  4. negotiate same or return arrangements with suppliers
• payable days calculation

  (trade payables / cost of sales) x365
• receivable days calculation

  (trade receivables/ revenues) x365