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  Efficiency

Introduction to Efficiency

Efficiency ratios are employed to try to assess how effectively the several resources of the business are managed. The subsequent ratios cover some of the more significant aspects of resource management:

  • Average inventories turnover period
  • Average settlement period for trade receivables
  • Average settlement period for trade payables
  • Sales revenue to capital employed
  • Sales revenue per employee.

Average inventories turnover period

Inventories frequently present a important investment for a business. For a number of types of business (for instance, manufacturers and definite retailers), inventories might account for a substantial proportion of the total assets held.

The average inventories turnover period ratio calculates the average period for which inventories are being held. The ratio is computed as follows:

Average inventories turnover period = (Average inventories held/Cost of sales) x 365

The average inventories for the period can be measured like a simple average of the opening and closing inventories levels for the year. Though, in the case of a extremely seasonal business, in which inventories levels may change significantly over the year, a monthly average might be more suitable, should this information be available.

Average settlement period for trade receivables

Selling on credit is the standard for most businesses, apart from for retailers. Trade receivables are an essential evil. A business will logically be considered with the amount of funds tied up in trade receivables and attempt to maintain this to a minimum. The speed of payment can have an important influence on the cash flow of business. The average settlement period for trade receivables ratio computes how long, on average, credit customers take to pay the amounts which they be indebted to the business.

The ratio is expressed follows:

Average settlement period for trade receivables = (average trade receivables/Credit sales revenue) x 365

Average settlement period for trade payables

The average settlement period for trade payables ratio computes how long, on average, the business consider to pay those who contain supplied goods and services on credit.

The ratio is expressed as follows:

Average settlement period for trade payables = (Average trade payables/Credit purchases) x 365

Sales revenue to capital employed

The sales revenue to capital employed ratio (or net asset turnover ratio) inspects how efficiently the assets of the business are being employed to produce sales revenue.

It is measured as follows:

sales revenue to capital employed ratio = (Sales revenue)/(Share capital + Reserves + Non current liabilities)

Sales revenue per employee

The sales revenue per employee ratio relates sales revenue produced to a specific business resource, i.e. labour. It gives a measure of the productivity of the workforce.

The ratio is expressed as follow:

Sales revenue per employee = (sales revenue)/(Number of employees)

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