IB Business Management Topic 3.6.1 Efficiency Ratios Revision Notes (HL)

IB Business Management Topic 3.6.1 Efficiency Ratios Revision Notes (HL) | RevisionDojo

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Efficiency Ratios: Measuring Business Performance

While profitability ratios assess how much money your business makes, efficiency ratios evaluate how well your company controls its operations.
These ratios focus on:
1. Stock management: ensuring optimal inventory levels
2. Debt settlement speed: how quickly the business repays its obligations
3. Credit control efficiency: how long customers take to settle accounts
4. Capital financing structure: the reliance on loan capital versus shareholder funds

Exam technique

Note

Efficiency ratios often appear in case studies.
Keep in your back pocket the common ways of interpreting them and recommend improvements.

Stock Turnover: How Quickly Inventory is Sold

Definition

Stock Turnover Ratio

The Stock Turnover Ratio measures how often a company sells and replaces its inventory within a given period.

It reflects the efficiency of inventory management and indicates how well the company is converting its stock into sales.

Stock Turnover Formula

$$\text{Stock Turnover Ratio} = \frac{\text{Cost of Sales}}{\text{Average Stock}}$$

Two key considerations:
1. Cost of sales is used instead of revenue, as it reflects the actual cost of goods sold.
2. Average stock is calculated as:

$$\text{Average Stock} = \frac{\text{Opening Stock} + \text{Closing Stock}}{2}$$

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Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Duis aute irure dolor in reprehenderit

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Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

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Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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Efficiency Ratios: Measuring Business Performance

While profitability ratios assess how much money your business makes, efficiency ratios evaluate how well your company controls its operations.
These ratios focus on:
1. Stock management: ensuring optimal inventory levels
2. Debt settlement speed: how quickly the business repays its obligations
3. Credit control efficiency: how long customers take to settle accounts
4. Capital financing structure: the reliance on loan capital versus shareholder funds

Exam technique

Note

Efficiency ratios often appear in case studies.
Keep in your back pocket the common ways of interpreting them and recommend improvements.

Stock Turnover: How Quickly Inventory is Sold

Definition

Stock Turnover Ratio

The Stock Turnover Ratio measures how often a company sells and replaces its inventory within a given period.

It reflects the efficiency of inventory management and indicates how well the company is converting its stock into sales.

Stock Turnover Formula

$$\text{Stock Turnover Ratio} = \frac{\text{Cost of Sales}}{\text{Average Stock}}$$

Two key considerations:
1. Cost of sales is used instead of revenue, as it reflects the actual cost of goods sold.
2. Average stock is calculated as:

$$\text{Average Stock} = \frac{\text{Opening Stock} + \text{Closing Stock}}{2}$$

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

Unit 1: Introduction to Business Management - Core operational components and business functions6 subtopics

Unit 2: HR Management - Motivation, Structure, Hierarchy7 subtopics

Unit 3: Financial Management - Accounting, Ratio evaluation, Core Financial Documents9 subtopics

Unit 4: Marketing Management - The 7 P's, strategies and forecasting6 subtopics

Unit 5: Operations Management - Production Methods, Production planning and management9 subtopics

BM Toolkit - Core business frameworks and tools15 subtopics

IB Business Management 3.6.1 Efficiency Ratios Notes

Unit 1: Introduction to Business Management - Core operational components and business functions6 subtopics

Unit 2: HR Management - Motivation, Structure, Hierarchy7 subtopics

Unit 3: Financial Management - Accounting, Ratio evaluation, Core Financial Documents9 subtopics

Unit 4: Marketing Management - The 7 P's, strategies and forecasting6 subtopics

Unit 5: Operations Management - Production Methods, Production planning and management9 subtopics

BM Toolkit - Core business frameworks and tools15 subtopics

Efficiency Ratios: Measuring Business Performance

Stock Turnover: How Quickly Inventory is Sold

Stock Turnover Formula

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Efficiency Ratios: Measuring Business Performance

Stock Turnover: How Quickly Inventory is Sold

Stock Turnover Formula

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account