Practice Flashcards
Stock turnover: higher = ___. Debtor days: lower = ___. Creditor days: higher = ___
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All Flashcards in Topic 3.6
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3.6.117 cards
Stock turnover: higher = ___. Debtor days: lower = ___. Creditor days: higher = ___
Better (faster sales); better (faster collection); keeps cash longer (but respect suppliers).
Better, better, longer
Debtor days formula?
(Trade receivables ÷ Sales revenue) × 365. Lower is better — faster cash collection.
Receivables ÷ revenue × 365
Two ways to improve stock turnover?
JIT stock management, promotions to clear slow stock, better demand forecasting, reduce product range.
JIT + promotions + forecasting
Stock turnover (times) formula?
Cost of goods sold ÷ Average stock. Higher = stock sells faster.
COGS ÷ avg stock
What do efficiency ratios measure?
How well a business manages its assets and liabilities — specifically stock, debtors and creditors.
Asset/liability management
Efficiency ratios measure the ___ of money flowing through the business
Speed — faster is usually better.
Speed
If debtor days are high and liquidity is low — the connection is ___
Cash is stuck with customers who haven't paid — directly causing the liquidity problem.
Cash stuck with debtors
Two ways to reduce debtor days?
Early payment discounts, tighten credit terms, chase overdue invoices, use factoring.
Discounts + chase + factoring
Creditor days formula?
(Trade payables ÷ COGS) × 365. Higher keeps cash longer — but don't upset suppliers.
Payables ÷ COGS × 365
Stock turnover (days) formula?
(Average stock ÷ COGS) × 365. Lower days = stock doesn't sit around long.
Avg stock ÷ COGS × 365
Always compare ratios ___ and against ___
Over time (trends) and against industry norms (benchmarks).
Time + industry
Three efficiency ratios to know?
Stock turnover, debtor days, creditor days.
Stock, debtors, creditors
COGS $200k, avg stock $25k. Stock turnover?
$200k ÷ $25k = 8 times/year. Days: ($25k ÷ $200k) × 365 = 46 days.
8 times, 46 days
Receivables $40k, revenue $400k. Debtor days?
($40k ÷ $400k) × 365 = 37 days.
37 days
How to manage creditor days?
Negotiate longer terms with suppliers, but always pay within agreed terms to maintain relationships.
Longer terms + keep relationships
Ideal: creditor days ___ debtor days. Why?
Greater than — collect from customers BEFORE paying suppliers = free cash flow.
Creditor > debtor
Supermarkets have ___ stock turnover; jewellers have ___
Very high (fast-selling perishables); low (expensive slow-moving items) — context matters!
High vs low
3.6.213 cards
Six factors affecting gearing decisions?
Interest rates, business risk, growth stage, asset base, industry norms, owner preference.
Rates, risk, growth, assets, industry, owner
Gearing ratio formula?
(Non-current liabilities ÷ Capital employed) × 100. CE = NCL + total equity.
NCL ÷ CE × 100
High gearing: high risk but potential for ___. Low gearing: safe but may limit ___
Higher returns (leverage); growth opportunities.
Returns vs growth
Three risks of high gearing?
Higher interest payments reducing profit, vulnerable to rate rises, less flexibility, insolvency risk if profits fall.
Interest + rates + insolvency
Stable businesses (utilities) can handle ___ gearing than volatile ones (startups)
Higher — predictable income can reliably cover interest payments.
Higher
High gearing = above ___%. Low gearing = below ___%
50% (high debt reliance, high risk); 25% (mostly equity, low risk). 25-50% = moderate.
50% high, 25% low
Two benefits of high gearing?
Interest is tax-deductible (cheaper than dividends); owners keep full control (no dilution).
Tax-deductible + control
Link gearing to ___ and ___ analysis
Sources of finance (debt vs equity); liquidity analysis.
Finance + liquidity
Gearing measures how reliant the business is on ___
Debt to finance its operations — proportion of capital from long-term borrowing.
Debt reliance
Three benefits of low gearing?
Lower financial risk, more attractive to cautious investors, greater flexibility to borrow later.
Low risk + attractive + flexible
No single 'correct' gearing level — what matters is ___
Whether the business can comfortably meet interest payments from operating profit.
Can it pay interest?
NCL $300k, equity $700k. Gearing?
CE = $1m. Gearing = ($300k ÷ $1m) × 100 = 30% — moderately geared.
30%
NCL $600k, equity $400k. Gearing?
CE = $1m. Gearing = ($600k ÷ $1m) × 100 = 60% — highly geared, higher risk.
60%
Topic 3.6 study notes
Full notes & explanations for Efficiency ratios (HL only)
BM exam skills
Paper structures, command terms & tips
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