Efficiency ratios

In this lesson

1. 0:00 Efficiency ratios overview
2. 0:05 Inventory turnover period explained
3. 1:03 Receivables collection period
4. 2:07 Payables payment period
5. 3:08 Working capital cycle calculation
6. 5:00 Cooley's Limited case study
7. 6:46 Interpreting working capital performance

About this lesson

These ratios measure how effectively a company manages its assets and liabilities by showing how many days inventory is held, how long it takes to collect cash from customers, and how long the company takes to pay suppliers. You'll also discover the working capital cycle formula—inventory turnover period plus receivables collection period minus payables payment period—which reveals the total time between paying for goods and receiving cash from sales. Understanding these ratios is essential for FM, PM, and SBL papers, as they directly assess operational efficiency and cash flow management, and examiners frequently ask you to interpret changes in these metrics and explain what drives them. The lesson walks you through each ratio with clear formulas and practical context. For inventory turnover period, you divide inventory by cost of sales and multiply by 365 to find average days held; variations stem from business type, product mix changes, inventory controls, or demand shifts. For receivables collection period, you use trade receivables divided by sales times 365 to measure how quickly you convert customer debts into cash; changes may reflect new credit terms, different customer types, or shifts in credit control processes. For payables payment period, you calculate trade payables divided by purchases times 365 to show how long you take to pay suppliers; this reflects your accounts payable effectiveness and can be influenced by supply terms or internal policy changes. The working capital cycle ties these together, measuring the cash conversion cycle—the gap between when you pay for stock and when you collect cash from customers. The lesson includes a worked example analysing Cooley's Limited, where the working capital cycle increased from eight to fifteen days, signalling deteriorating efficiency. You'll learn how to break down this change: the receivables collection period lengthened from 24 to 35 days, suggesting weaker debt collection or deliberate extended credit to new customers; inventory turnover period rose from 14 to 20 days, indicating slower stock movement possibly due to falling demand or poor inventory controls; and payables payment period extended from 30 to 40 days, which might reflect new supplier terms but risks damaging supplier relationships. This practical interpretation approach equips you to analyse real performance data and explain the business reasons behind ratio movements—a core skill for case study and exam success.

Duration: 8m