In this revision presentation, we provide an overview of financial efficiency rations - which assess how effectively a business is managing its assets.

1. Financial
Efficiency
Ratios

2. Financial efficiency ratios
Assess how
effectively a
business is managing
its assets

3. Financial efficiency ratios
Asset turnover
Stock turnover
Debtor days
Creditor days
* Covered in BUSS2

4. Asset turnover
Revenue (sales)
Asset turnover =
Net assets
Example
Example
Revenue = £21,450k
Revenue = £21,450k
Net assets = £4,455k
Net assets = £4,455k
Asset turnover = 4.8 times
Asset turnover = 4.8 times

5. Evaluating asset turnover
• A rough guide to how intensively a
business uses its assets
• Some limitations of the ratio:
– Takes no account of how profitable the
revenue is
– Less relevant for labour-intensive businesses
– Will vary widely from industry to industry
– Can fluctuate from year to year (e.g. major
investment in fixed assets in one year
generates increased sales in following years

6. Stock turnover
Cost of sales
Stock turnover =
Average stock held
Example
Example
Cost of sales = £13,465k
Cost of sales = £13,465k
Average stock = £1,325k
Average stock = £1,325k
Stock turnover = 10.2 times
Stock turnover = 10.2 times

7. Evaluating stock turnover
• Interpreting the number
– In general, a higher number is better
– Low number (compared with previous period or
competitors) suggests problem with stock control
• Some issues to consider:
– Stock turnover varies from industry to industry
– Holding more stock may improve customer service &
allow the business to meet demand
– Seasonal fluctuations in demand during the year may
not be reflected in the calculations
– Stock turnover is irrelevant for many service sector
businesses (but not retailers, distributors etc)

8. Actions to improve stock turnover
• Sell-off or dispose of slow-moving or
obsolete stocks
• Introduce lean production techniques to
reduce stock holdings
• Rationalise the product range made or sold
to reduce stock-holding requirements
• Negotiate sale or return arrangements with
suppliers – so the stock is only paid for
when a customer buys it

9. Debtor days
Trade debtors
Debtor days = x 365
Revenue (sales)
Example
Example
Revenue = £21,450k
Revenue = £21,450k
Trade receivables = £4,030k
Trade receivables = £4,030k
Debtor days = 68.6 days
Debtor days = 68.6 days

10. Evaluating debtor days
• Interpreting the results:
– Shows the average time customers take to pay
– Each industry will have a “norm”
– Need to take account of terms & conditions of
sale
– The important data is any significant change
• Look out for
– Comparisons (good or bad) v competitors
– Balance sheet window-dressing

11. Creditor days
Trade payables
Creditor days = x 365
Cost of sales
Example
Example
Cost of sales = £13,465k
Cost of sales = £13,465k
Trade payables = £2,310k
Trade payables = £2,310k
Creditor days = 62.6 days
Creditor days = 62.6 days

12. Evaluating creditor days
• Interpreting the results
– In general, a higher figure is better
– Ideally, creditor days is higher than debtor days
– Be careful: a high figure may suggest liquidity
problems
• Look out for:
– Evidence from the current ratio or acid test ratio
that business has problems paying creditors
– Window-dressing: this is easiest figure to
manipulate

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