EFFICIENCY RATIOS Receivables Turnover Ratio (RTR) The receivables turnover ratio measures how effectively a company collects its accounts receivable or manages the credit it extends to its customers Benchmark © Industry benchmarks vary significantly * Higher RTR indicates a quicker collection of receivables, which is always favourable —> Formula Net Credit Sales Receivables Turnover Ratio = asr352 accounts Receivable Results: Interpretation Strength: A high RTR suggests effective credit management and timely collection of receivables © Weakness: A low RTR practicesEFFICIENCY RATIOS Inventory Turnover The inventory turnover ratio measures how effectively and efficiently the inventory is managed and how quickly it is sold and replaced over a specific period Benchmark © Industry benchmarks vary significantly © High ITRs are better, indicating faster inventory turnover * Benchmarks can range from 4 to 10 or higher, depending on the industry Formula Cost of Goods Sold Inventory Turnover Ratio = oo Tavantory Results: Interpretation ‘* Strength: High ITR suggests effective inventory management, reduced holding costs and better cash flow © Weakness: Low ITR indicates overstocking, slow-moving inventory or inefficient purchasing practicesEFFICIENCY RATIOS Payables Turnover Ratio (PTR) The payables turnover ratio measures how Formula efficiently a company pays its suppliers and manages its accounts payable. It shows how ——? many times a company pays off its accounts Payables Turnover Ratio = - payable during a particular period Benchmark Results: Interpretation « Industry benchmarks vary significantly « Strength: High PTR suggests effective management * Higher PTR indicates faster payment to suppliers, of trade Cred ord Wotan Cotacal which can improve relationships and potentially * Weakness: Low PTR indicates liquidity issues or leverage discounts strained supplier relationshipsEFFICIENCY RATIOS Average Receivables Collection Period (DSO) The average receivables collection period, Formula also called days of sales outstanding (DSO), represents how long it takes, on average, for Ged a ae a company to collect the money owed by Sales per Day customers after making a sale © Here, © Sales per day = Sales revenue / 360 Benchmark Results: Interpretat n © Benchmarks vary by industry, but typically, © Strength: Lower DSO suggests efficient credit policies 30 to 45 days is considered good and effective accounts receivable management * Lower DSO indicates a quicker collection of ‘* Weakness: Higher DSO indicates credit issues, receivables, which is favourable ‘customer payment delays or inefficient collection processesEFFICIENCY RATIOS Average Inventory Processing Period (AIPP) The average inventory processing period Formula measures the average number of days it takes ~——> for a company to sell and replace its inventory Average Inventory _ ___A\ : Processing Period Cost of Goods Sold per Day Where, Cost of goods sold © Cost of Goods Sold Per Day: 360 Benchmark Results: Interpretation ' Industry benchmarks can vary widely, but typically, '* Strength: Lower AIPP suggests efficient inventory a lower AIPP indicates faster inventory turnover management and reduced inventory carrying costs and better liquidity * Weakness: Higher AIPP indicates excess inventory, slow sales or inefficient productionEFFICIENCY RATIOS Average Payable Days (Payment Period) Average payable days measures the average number of days it takes for a company to pay its suppliers. It indicates how quickly the company settles its bills after receiving goods or services Benchmark « Longer payment period indicates better cash flow management but should be balanced with maintaining good supplier relationships * Benchmarks vary by industry practices and ‘supplier terms. Formula ‘Average Accounts Payable Average Payable Days = == Be Payanle DAYS * Cost of Goods Sold per Day © Where, Cost of goods sold © Cost of Goods Sold Per Day = = 360 Results: Interpretation « Strength: Longer payment period can improve cash flow and working capital management Weakness: Longer payment period may strain supy relationships or lead to missed discountsEFFICIENCY RATIOS Cash Collection Cycle (CCC) The cash collection cycle measures the time it takes for cash to flow back into the company after the outlay for inventory Benchmark ‘© Benchmarks can vary by industry and company size * Shorter cycle is preferred, as it implies quicker cash flow and better liquidity management Formula * Cash collection cycle = Average receivables collection period (DSO) + Average inventory processing period (AIPP) ~ Average payable days (payment period) Results: Interpretation « Strength: Shorter cash collection cycle indicates more efficient management of working capital and faster conversion of inventory and receivables into cash ‘* Weakness: Longer cash collection cycle indicates problems with collecting payments, managing inventory or paying suppliers on time, which might lead to cash flow issues