What do efficiency ratios measure?

They measure how well a business manages the working capital tied up in inventory, customers and suppliers.

A business has cost of sales of £480,000 and average inventory of £60,000. Calculate its inventory turnover.

Inventory turnover is £480,000 divided by £60,000 = 8 times a year.

A business turns its inventory over 8 times a year. Express that as a number of days.

Dividing 365 by 8 gives about 46 days of inventory held.

Why would a bakery need a far higher inventory turnover than a jeweller?

Its stock is perishable and worthless within days, whereas jewellery keeps its value indefinitely and each item may sit in the display case for months before it sells.

How could a business raise its inventory turnover?

Order in smaller, more frequent batches so less stock is held, and discount slow-moving lines to clear them.

OCR A-Level Business (H436) H436

Business Activity

Topic overview Buying, selling and adding value Spotting an opportunity and starting a business Entrepreneurs and intrapreneurs Risk, reward and uncertainty Business objectives: profit, growth, survival and sustainability SMART objectives and the usefulness of objectives Primary, secondary and tertiary sectors Sole traders and partnerships Private and public limited companies Liability, legal status and choosing an ownership structure Social enterprises and not-for-profit organisations The stakeholders of a business What each stakeholder wants from a business Conflicting stakeholder objectives Measuring the size of a business Organic growth and franchising Mergers, takeovers, integration and diversification Factors influencing the scale of operations Economies and diseconomies of scale Market power and overtrading Stages of the customer journey Customer experience and how it is measured

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Topic overview The purpose of marketing and the unique selling point Market orientation and product orientation Why a business researches its market Primary research: questionnaires, focus groups and observation Secondary research sources and their reliability Random, stratified and systematic sampling Qualitative and quantitative research data Market size, market share and market growth Consumer markets and business markets Mass markets and niche markets Segmenting a market into customer groups New product development, innovation and R&D The product life cycle and extension strategies The Boston Matrix and product portfolio analysis Skimming, penetration and cost-plus pricing Competitor, psychological, dynamic and freemium pricing Price and income elasticity of demand Advertising, sponsorship and public relations Sales promotion, direct mail and point of sale Branding and packaging Social media, influencers and content marketing Websites, search engine optimisation and pay-per-click advertising Distribution channels, e-commerce and intermediaries Why businesses forecast their sales Historical sales forecasting and the line of best fit Intuitive forecasting and forecasting for a new product Big data and artificial intelligence in marketing Gamification, virtual reality and augmented reality Complaints, reviews and the net promoter score

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Operations

Topic overview The purpose of operations and the transformation process Added value and how it is calculated Ways of adding value: convenience, branding, design and facilities Sustainability as a way of adding value Automation, robotics and 3D printing in production AI, cloud services and digital technology in production Efficiency, effectiveness and productivity Measuring and improving productivity Production quality: purpose and standards Quality control and quality assurance Capacity utilisation and how it is calculated Managing capacity: increasing output, cutting capacity and outsourcing Types of inventory and the purpose of inventory control Inventory control charts, re-order levels and lead time Just In Time and inventory management systems The stages of supply chain management Logistics: procurement, transport and reliability of supply Key performance indicators in operations

Finance

Topic overview The finance function and business failure Assets, liabilities and capital Cash, profit and working capital Cost behaviour and sales revenue Contribution and the break-even point Break-even charts and the margin of safety Using contribution to make short-term decisions Levels of profit and profit margins Budgets and budget setting Budget variances Cash flow forecasting and its uses The structure of a cash flow forecast Remedies for a cash flow shortage Liquidity, the current ratio and the acid test Retained profit, owners' investment and asset sales Loans, overdrafts and other debt finance Share capital, venture capital, crowdfunding and grants Choosing a source of finance Financial statements and who uses them The income statement The statement of financial position (balance sheet)Return on capital employed and gearing Inventory turnover, receivable days and payable days Ratio analysis and its limitations

External Influences

Topic overview Demand, supply and the market mechanism Price, income and the drivers of demand Costs, capacity and the drivers of supply Rivalry, market share and competitor behaviour Imports, exports and the case for open trade Trade barriers and trade agreements Exchange rates and the value of the pound Culture, law and politics in overseas markets The forces behind a globalised market Political stability and the reach of government policy The business cycle and the state of the economy Interest rates, tax and subsidies Demographics, lifestyle and cultural change Shopping habits, communities and pressure groups Artificial intelligence, automation and robotics Cybersecurity, cloud services and connected devices

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Finance

Inventory turnover, receivable days and payable days

1 thing to know
Component 02

Overview

Recall questions on efficiency ratios, calculating inventory turnover, trade receivable days and trade payable days, interpreting and improving each figure, and working out how long cash is tied up in the trading cycle.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Numbers

State the formula for inventory turnover in times per year.

Questions from this subtopic

Each one with the model answer underneath.

1
What do efficiency ratios measure?
Model answer
They measure how well a business manages the working capital tied up in inventory, customers and suppliers.
2
State the formula for inventory turnover in times per year.
Model answer
Inventory turnover = cost of sales divided by average inventory.
3
A business has cost of sales of £480,000 and average inventory of £60,000. Calculate its inventory turnover.
Model answer
Inventory turnover is £480,000 divided by £60,000 = 8 times a year.
4
A business turns its inventory over 8 times a year. Express that as a number of days.
Model answer
Dividing 365 by 8 gives about 46 days of inventory held.
5
Why would a bakery need a far higher inventory turnover than a jeweller?
Model answer
Its stock is perishable and worthless within days, whereas jewellery keeps its value indefinitely and each item may sit in the display case for months before it sells.
6
How could a business raise its inventory turnover?
Model answer
Order in smaller, more frequent batches so less stock is held, and discount slow-moving lines to clear them.

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