1. Asset Turnover Dynamics
Efficiency ratios measure how quickly a business converts its working capital components into sales or cash. Fast cycles reduce the amount of cash locked up in daily operations.
2. Core Efficiency Formulas
  • Inventory Turnover Period (Days): Measures the average number of days inventory sits in the warehouse before being sold.

Inventory Days (Inventory Turnover Period) = (Average Inventory ÷ Cost of Goods Sold (COGS)) × 365
  • Trade Receivables Collection Period (Days): Tracks how long it takes, on average, for credit customers to pay their invoices.

Receivables Days (Collection Period) = (Average Trade Receivables ÷ Credit Sales) × 365
  • Trade Payables Payment Period (Days): Tracks how long the business takes to pay its credit suppliers.

Payables Days (Payment Period) = (Average Trade Payables ÷ Credit Purchases) × 365
 
3. Managing the Efficiency Balance
A business should aim to collect customer debts quickly while stretching supplier payment terms out as long as reasonably possible without damaging vendor relationships or losing prompt-payment discounts.
PreviousNext