Efficiency Ratio Analysis (DP IB Business Management: HL): Exam Questions

Stream Design Studios is a graphic design company that creates marketing materials for small and medium-sized businesses. The company has recently expanded its services to include web development and social media management, requiring significant investment in new software and employee training.

Stream’s financial ratios show mixed results. Its debtor days ratio has increased due to extended payment terms for some clients, causing cash flow challenges. Meanwhile, its stock turnover ratio has remained stable, as digital services do not require physical inventory. The company’s gearing ratio has also risen slightly due to a new loan used to fund the expansion.

To address these issues, Stream Design Studios is considering incentivising clients to pay invoices faster and using profits from its core design services to pay down the loan.

Stream Design Studios is a graphic design company that creates marketing materials for small and medium-sized businesses. The company has recently expanded its services to include web development and social media management, requiring significant investment in new software and employee training.

Stream’s financial ratios show mixed results. Its debtor days ratio has increased due to extended payment terms for some clients, causing cash flow challenges. Meanwhile, its stock turnover ratio has remained stable, as digital services do not require physical inventory. The company’s gearing ratio has also risen slightly due to a new loan used to fund the expansion.

To address these issues, Stream Design Studios is considering incentivising clients to pay invoices faster and using profits from its core design services to pay down the loan.

Belvedere Event Management organises weddings, corporate events, and festivals. The company recently expanded into luxury event planning, requiring significant investment in new marketing campaigns and hiring additional staff.

Belvedere's financial ratios highlight areas for improvement. Its creditor days ratio has increased due to extended payment terms negotiated with suppliers, which has helped improve liquidity. However, its return on capital employed (ROCE) has decreased, as recent investments have not yet generated significant returns. The company is also concerned about its debtor days ratio, which has risen due to delayed payments from corporate clients.

Belvedere Event Management organises weddings, corporate events, and festivals. The company recently expanded into luxury event planning, requiring significant investment in new marketing campaigns and hiring additional staff.

Belvedere's financial ratios highlight areas for improvement. Its creditor days ratio has increased due to extended payment terms negotiated with suppliers, which has helped improve liquidity. However, its return on capital employed (ROCE) has decreased, as recent investments have not yet generated significant returns. The company is also concerned about its debtor days ratio, which has risen due to delayed payments from corporate clients.

Bright Studios Photography offers professional photography services for weddings, portraits, and commercial projects. The company recently expanded into videography, requiring investment in new equipment and training for its photographers.

Bright Studios’ stock turnover ratio has decreased slightly due to delays in selling older photography packages. Meanwhile, its gearing ratio has remained stable, but management is reviewing whether taking on additional debt to purchase advanced equipment for videography is a sound decision. The company’s creditor days ratio has also risen as it negotiates extended payment terms with suppliers to improve cash flow.

Management is exploring whether to sell older photography equipment to improve liquidity and whether investing in advanced videography technology will yield sufficient returns.

Bright Studios Photography offers professional photography services for weddings, portraits, and commercial projects. The company recently expanded into videography, requiring investment in new equipment and training for its photographers.

Bright Studios’ stock turnover ratio has decreased slightly due to delays in selling older photography packages. Meanwhile, its gearing ratio has remained stable, but management is reviewing whether taking on additional debt to purchase advanced equipment for videography is a sound decision. The company’s creditor days ratio has also risen as it negotiates extended payment terms with suppliers to improve cash flow.

Management is exploring whether to sell older photography equipment to improve liquidity and whether investing in advanced videography technology will yield sufficient returns.

BakeWell Ltd produces and sells artisan baked goods to local cafés and restaurants. The company maintains a significant inventory to meet fluctuating demand. BakeWell is assessing how efficiently it is managing its stock in 2024.

SwiftFurnish Ltd sells home furniture to retailers on credit. The business is reviewing its efficiency in collecting payments from customers, as improving cash flow is a priority.

GreenGrow Ltd supplies agricultural equipment to farmers, purchasing stock on credit from its suppliers. The company wants to evaluate its efficiency in managing payment terms with creditors.

SteelForge Ltd manufactures industrial tools and equipment for global distribution. The company has grown rapidly in recent years and relies on a mix of shareholder equity and long-term loans to finance its operations. Management wants to review the gearing ratio for 2024 to assess the balance of its funding structure.

Green Grow is a sustainable farming company that grows vegetables using hydroponics, a modern method where plants grow in nutrient-rich water instead of soil. This process reduces the need for large amounts of land and uses water more efficiently than traditional farming methods. The company’s mission is “To grow food sustainably while protecting the planet”

Green Grow supplies fresh produce to supermarkets, restaurants, and online grocery services. Customers like the company’s eco-friendly and locally sourced vegetables. Green Grow uses a just-in-time (JIT) stock management system to avoid waste and ensure vegetables are harvested and delivered fresh to customers. However, relying on JIT can cause problems when suppliers deliver seeds or nutrients late. These delays sometimes stop production, which means customer orders are not always delivered on time

Lean production is an important part of Green Grow’s operations. The company uses Kaizen, a system where employees regularly suggest small changes to improve processes. For example, a recent suggestion helped the company reduce packaging waste by 10%. To monitor efficiency, Green Grow tracks key performance indicators such as stock turnover, wastage rates and delivery times. While the company’s stock turnover ratio has remained stable, the average delivery delay has increased slightly due to supplier issues.

Employee motivation is essential for Green Grow to achieve its goals. The company offers flexible working hours, training opportunities and performance-based bonuses. Many employees say they are motivated by Green Grow’s mission to protect the environment. However, a staff survey found that some workers feel stressed by the tight schedules required by JIT, and others feel that their contributions are not recognised. The company also faces challenges such as a rising absenteeism rate and increased labour turnover, which management is working to address.

To improve its operations, Green Grow is considering investing in automation. This would make production more reliable by reducing delays caused by supplier problems. The investment would cost $500,000 and could improve efficiency by 20%. However, the company would need to fund this project, possibly through a loan, which could increase its gearing ratio and financial risks, and we do not know whether shareholders would be keen to take this on

Table 1: Key financial data (2023 and 2022)

Table 2: Employee metrics (2023 and 2022)

Table 3: Operational efficiency metrics (2023 and 2022)

Belvedere’s financial ratios reveal areas for improvement. The creditor days ratio has increased due to extended payment terms negotiated with suppliers, which has helped improve liquidity. However, the debtor days ratio has risen, as some corporate clients have delayed payments, putting pressure on cash flow. Additionally, the company’s return on capital employed has decreased, as recent investments in luxury services have yet to generate significant returns

To address these challenges, management is reviewing its credit control policies and considering offering discounts for early payments to improve debtor days. The company is also focused on its marketing strategy. In the competitive luxury events market, Belvedere plans to promote its unique selling points: bespoke planning services, partnerships with premium retailers and sustainability initiatives

Belvedere’s marketing plan includes objectives such as increasing brand awareness, boosting revenue by 15% within two years and improving customer retention. To achieve these goals, the company plans to focus on its target market of high-income clients through digital campaigns, collaborations with social media influencers and advertisements in luxury lifestyle magazines. Management has allocated an approximate budget of £150,000 to implement these strategies, which are expected to support revenue growth and position the company as a leader in the luxury events market

Table 1: Key financial ratios

Table 2: Marketing plan components