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Summary Knowledge clip - efficiency (Operational Management)
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Summary knowledge clip efficiency
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Knowledge clip, efficiencyEfficiency ratios
How effective is the use of a company’s resources. The effectivity of a company.
Trade receivables/ invoice
How long, on average, take credit customers to pay the amounts that they owe to the business? How
long does it take you to collect your money/ are you able to collect your money?
Average settlement period for trade receivables, is about how long, on average, take credit
customers to pay the amount that they owe to the business? The lower the better, because they pay
you as soon as possible.
The calculation:
(Trade receivables/ credit sales revenue) x 365
Inventory
How quickly are our inventories sold? And also what kind of stock do you hold? For example, is not
good as inventory.
Average inventories turnover period, which calculates how much days you have your inventories in
stock. So, how much inventories are we buying and how quickly is this sold?
The calculation:
(Average inventories held/ cost of sales) x 365
Trade payables
Debts that we have at our suppliers. And then the question is how quickly do we pay our debts (trade
payables)?
Average settlement period for trade payables is about how long, on average, takes the business to
pay those who have supplied goods and services on credit?
The calculation:
(Trade payables/ credit purchases) x 365
You look at the connection between the ratios. For example, are we receiving money from our
customers before or after paying our debtors?
Sales revenue to capital employed
How effective are we in generating income from the capital we employ?
The sales revenue to capital employed is about how effectively are the assets of the business used to
generate sales revenue?
The calculation:
(Sales revenue/ share capital + reserves + non-current liabilities)
However, there are a lot of more efficiency ratios. So also use your common sense by thinking of how
you can improve the efficiency of the company.
Efficiency ratio analysis
Efficiency ratios will help you with decision making on a day to day business basis.
You can see if you are becoming more or less efficient.
You can look at a series of time periods and also get different efficiency ratios together to make sure
that you are managing your activities most effectively.
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