Efficiency ratios used by businesses

Efficiency Ratios

Efficiency ratios are essential for evaluating a company's effectiveness in using assets and liabilities to generate sales and profits. They reflect how well a business manages its resources, particularly its inventory.

Rate of Inventory Turnover

This ratio measures how quickly a company sells and replaces its stock over a specific period, indicating inventory and sales efficiency.

• Desirable Outcome: A higher turnover indicates strong sales and effective inventory management.
• Formula: Cost of Sales / Average Inventory

Interpretation:

Low turnover may signal issues like product quality, marketing, or customer service affecting sales.

Factors Impacting Stock Turnover

• Quality of Goods
• Customer Service
• Advertising

Optimisation Strategies

• Enhanced Marketing
• Quality Improvement
• Customer Service Training

Practical Implications

• High Turnover Example: A fast-fashion retailer indicates strong demand.
• Low Turnover Example: An electronics store may need to review its product range or pricing strategies.

Efficiency ratios, like inventory turnover, offer insights into sales performance and inventory control. Regular monitoring and improvement are crucial for operational efficiency and competitiveness.