C2 Efficiency Ratios
Efficiency ratios measure how well a business is using its resources to generate income. Good management of stock and reducing time it takes to complete processes can improve the efficiency of a business.
Trade receivable days measures how quickly customers settle their bills. If it takes too long, it may imply that a business needs better systems in place to chase payments. It is calculated using the formula
trade receivable days = (trade receivable/credit sales) × 365
Trade payable days measure how quickly a business pays its invoices. If they take longer to pay their invoices, their liquidity increases but they may risk their relationships with suppliers. It is calculated using the formula
trade payable days = (trade payables/credit purchases) × 365
The inventory turnover ratio measures how long the average item of stock is held by a business before it is sold. Longer times may result in high storage costs and obsolete stock and could be the result of overproduction or poor marketing. It is calculated using this formula
inventory turnover ratio = (average inventory/cost of sales) × 365
