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IBBusinessDPBusiness ManagementHLFlashcards3. Finance & Accounts3.6 Efficiency Ratio Analysis

3.6 Efficiency Ratio Analysis (DP IB Business Management)

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  • What does the stock turnover ratio measure?

    The stock turnover ratio measures how well a business converts its stock into sales.

  • What is the formula for calculating average stock?

    Formula.

    Average space stock space equals space fraction numerator Opening space stock space plus space Closing space stock over denominator 2 end fraction

  • True or False?

    A high stock turnover ratio is generally desirable for businesses

    True.

    A high stock turnover ratio is generally desirable for businesses as it means stock is being used quickly to generate sales.

  • What are perishable goods?

    Perishable goods are products that can spoil or deteriorate quickly and need to be sold in a short time frame.

  • True or False?

    Businesses aim for a high number of days in their stock turnover ratio.

    False.

    Businesses aim for a low or falling number of days in their stock turnover ratio

  • State one way to improve the stock turnover ratio.

    The two main ways to improve the stock turnover ratio are:

    • Holding less stock

    • Reducing the cost of sales

  • What is just-in-time stock management?

    Just-in-time stock management is where stock is ordered and received only when it is needed for production or sales.

  • True or False?

    Businesses should aim for a stock turnover ratio of 5.

    False.

    There is no ideal ratio for stock turnover, as it varies depending on the type of business and industry.

  • What does the gearing ratio show?

    The gearing ratio illustrates the long-term financial structure of a business - the balance of non-current liabilities to shareholder capital used to fund a business.

  • What is the formula used to calculate the gearing ratio?

    Formula.

    Gearing space ratio space equals space fraction numerator Non space current space liabilities over denominator Capital space employed end fraction space straight x space 100

  • True or False?

    A gearing ratio of more than 50% indicates a low-geared business.

    False.

    A gearing ratio of more than 50% indicates a highly-geared business.

  • What does it mean if a business is low-geared?

    If a business is low-geared, it means the business is largely funded by shareholder capital rather than loans.

  • Define the term capital employed.

    Capital employed is the total amount of capital used in a business, calculated by adding non-current liabilities to equity.

  • True or False?

    High gearing is always problematic for businesses.

    False.

    High gearing can be less problematic when interest rates are low or for large and profitable businesses capable of meeting their debt obligations.

  • State one way a business could reduce its gearing.

    The two main ways to improve gearing are:

    • Reducing long-term borrowing

    • Raising equity capital

  • What is a rights issue?

    A rights issue is a way of raising equity capital by offering existing shareholders the right to buy additional shares at a discounted price.

  • Define the term debtor days.

    Debtor days refers to the average number of days it takes for a business to collect money from its debtors.

  • What is the formula for calculating debtor days?

    Formula.

    Debtor space days space equals space fraction numerator Debtors over denominator space Total space credit space sales space revenue end fraction space cross times space 365

  • True or False?

    A high debtor days ratio is desirable for businesses.

    False.

    A low or reduced debtor days ratio is desirable for businesses as it indicates efficiency in collecting outstanding debts.

  • Define the term creditor days.

    Creditor days is the average number of days a business takes to pay its creditors.

  • What is the formula for calculating creditor days?

    Formula.

    Creditor space days space equals space fraction numerator Creditors over denominator space Cost space of space sales end fraction space cross times space 365

  • True or False?

    Businesses generally aim for a high or increasing creditor days ratio.

    True.

    Businesses generally aim for a high or increasing creditor days ratio.

  • What is meant by the term insolvency?

    Insolvency is the inability of a business to pay debts and continue trading.

  • What is meant by the term bankruptcy?

    Bankruptcy occurs when a business ceases to trade and the value of its possessions is distributed to its creditors.

  • What is meant by the term liquidation?

    Liquidation is the selling of business assets to settle outstanding debts and dissolve a company.

  • What is administration in the context of business insolvency?

    Administration is a process that protects businesses from creditors while they attempt to settle debts and continue trading.

  • State one way to reduce the debtor days ratio.

    Ways to reduce the debtor days ratio include:

    • Streamline invoicing and credit control processes

    • Establish and monitor creditworthiness of customers

    • Improve payment systems

    • Provide incentives for early payment

    • Refuse to provide further goods unless outstanding debts are paid

    • Threaten to take legal action

  • True or False?

    A low creditor days ratio indicates skills of negotiation in arranging extended credit terms with suppliers.

    False.

    A high or increasing creditor days ratio indicates skills of negotiation in arranging extended credit terms with suppliers.

  • What is meant by the term creditworthiness?

    Creditworthiness is the suitability of a business or individual to receive credit, related to their reliability in paying money back in the past.

  • What is a credit controller's role?

    A credit controller manages negotiations about payments with their suppliers.

Previous:3.5 Profitability & Liquidity Ratio AnalysisNext:3.7 Cash Flow

    1. Topic 1

      1.1 What is a Business?

    2. Topic 2

      1.2 Types of Business Entities

    3. Topic 3

      1.3 Business Objectives

    4. Topic 4

      1.4 Stakeholders

    5. Topic 5

      1.5 Growth & Evolution

    6. Topic 6

      1.6 Multinational Companies (MNCs)

    1. Topic 1

      2.1 Introduction to Human Resource Management

    2. Topic 2

      2.2 Organisational Structure

    3. Topic 3

      2.3 Leadership & Management

    4. Topic 4

      2.4 Motivation & Demotivation

    5. Topic 5

      2.5 Organisational (Corporate) Culture

    6. Topic 6

      2.6 Communication

    7. Topic 7

      2.7 Industrial Relations

    1. Topic 1

      3.1 Introduction to Finance

    2. Topic 2

      3.2 Sources of Finance

    3. Topic 3

      3.3 Costs & Revenues

    4. Topic 4

      3.4 Final Accounts

    5. Topic 5

      3.5 Profitability & Liquidity Ratio Analysis

    6. Topic 6

      3.6 Efficiency Ratio Analysis

    7. Topic 7

      3.7 Cash Flow

    8. Topic 8

      3.8 Investment Appraisal

    9. Topic 9

      3.9 Budgets

    1. Topic 1

      4.1 Introduction to Marketing

    2. Topic 2

      4.2 Marketing Planning

    3. Topic 3

      4.3 Sales Forecasting

    4. Topic 4

      4.4 Market Research

    5. Topic 5

      4.5 The Marketing Mix (7 P's)

    6. Topic 6

      4.6 International Marketing

    1. Topic 1

      5.1 Introduction to Operations Management

    2. Topic 2

      5.2 Operations Methods

    3. Topic 3

      5.3 Lean Production & Quality Management

    4. Topic 4

      5.4 Location

    5. Topic 5

      5.5 Break-Even Analysis

    6. Topic 6

      5.6 Production Planning

    7. Topic 7

      5.7 Crisis Management & Contingency Planning

    8. Topic 8

      5.8 Research & Development (R&D)

    9. Topic 9

      5.9 Management Information Systems

    1. Topic 1

      6.1 The Business Management Toolkit