Measuring Business Efficiency with Inventory Turnover and Receivable/Payable Days

The lecture discusses how to measure business efficiency using three key ratios: inventory turnover, receivables days, and payables days. Inventory turnover measures how often a business sells and replaces its inventory. Receivables days indicate the average time customers take to pay, while payables days show how long a business takes to pay its suppliers. Strategies to optimize cash flow include reducing receivables days and extending payables days. The lecture emphasizes the importance of balancing these ratios for healthy cash flow and business efficiency.

What are the three main formulae used to measure business efficiency?

• Inventory turnover, receivable days, payables days

• Liquidity ratio, solvency ratio, profitability ratio

• Profit margin, net income, gross revenue

• Return on investment, equity ratio, debt ratio

How is inventory turnover calculated?

• Total liabilities divided by total equity

• Net income divided by total revenue

• Cost of goods sold divided by average inventory

• Sales divided by total assets

What does an inventory turnover of 10 indicate?

• Inventory is sold and replaced every 10 days

• Inventory is sold and replaced 10 times a year

• Inventory is sold and replaced 10 times a month

• Inventory is sold and replaced every 10 months

Which industry is likely to have high receivables days?

• Grocery store

• Construction

• Butcher

• Bakery

What is one strategy to reduce receivables days?

• Delay product delivery

• Extend credit periods

• Offer discounts for early payments

• Increase product prices

What is a potential benefit of paying suppliers quickly?

• Longer credit periods

• Higher interest rates

• Increased cash reserves

• Improved business reputation

What is the ideal scenario for receivables and payables days?

• High receivables days and low payables days

• High receivables and payables days

• Low receivables days and high payables days

• Equal receivables and payables days