Inventory Turnover Ratios

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Efficiency Analysis

Profitability is not the only metric by which a company’s performance is measured. By analysing efficiency ratios, an organisation is able to measure “how effectively certain resources have been utilised by the business” (Atrill, et al., 2015, p. 253). The monitoring of key internal activities, provides organisations with relevant data for comparison purposes, using benchmarks such as a previous financial periods, industry competitors or planned performance for evaluation (Atrill, et al., 2015, p. 254). An analysis of the following four efficiency ratios, using financial data from GWA Group Limited, between 2011 and 2014 found mixed results on organisational performance across the period.

Inventory Turnover Ratio:
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As most business rely on credit sales, a shorter settlement period is usually preferred, as a delay in receiving funds can place strain on an organisations abilities to meet its obligations. Effective management of accounts receivable minimises the risk of bad or doubtful debts. The efficiency calculations completed for GWA (Appendix *), show the average settlement period for accounts receivables was 73.5 days for the period. As illustrated below in Figure *, the settlement period was relatively stable at 73 days in 2011 to 71 days in 2012 and 2013, however, this figure peaked at 79 days in 2014. In 2014, GWA Group Limited had “three major customers which comprised 44% of the trade receivables” (GWA Group Limited, 2014, p. 74); therefore, one slow paying debtor could have contributed to the spike in settlement days. Although, there is an opportunity here for GWA to focus on reducing the collection …show more content…
Suppliers expect payment within the agreed terms. However, an organisation not operating effectively, may purposefully delay payments to suppliers using accounts payable funds as “a free source of finance for the business” (Atrill, et al., 2015, p. 262). Abuse of the accounts payable facility could damage supplier relations and harm a business’s reputation. The efficiency calculations completed for GWA (Appendix *), show the average settlement period for accounts payable was 72 days. As illustrated below in Figure *, the average settlement period has consistently increased year on year, from 67 days in 2011 to 79 days in 2014. The Gliderol impairment charge of $17 million in December 2013 (GWA Group Limited, 2014, p. 17) could be a contributing factor; however, this rising trend shows that GWA Group Limited are becoming operationally less efficient at settling external liabilities This suggests the business is increasingly relying on creditors to fund daily

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