Purchasing and Financing 2024

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Evaluating the Management Efficiency of an Organisation a. Accounts Receivable Turnover Accounts Receivable Turnover allows a company to measure whether or not the company is effectively collecting payments for sales on credit. A high turnover indicates higher cash basis sales or efficient collections. A low turnover indicates collection problems and possible bad debts. Most companies do not charge interest on Accounts Receivable unless the account becomes past due. An extension of credit is then essentially an interest free loan to customers and not collecting payments on time creates inefficiency and opportunity costs for the company. For example, the company could use the cash to invest the money and earn interest, pay down debt from which the company is incurring interest expenses, or finance growth opportunities instead of having money tied up in Accounts Receivable. Accounts Receivable Turnover = Net Credit Sales/Average Net Receivables (Net Average Receivables = (Beginning Net Receivables Balance + Ending Net Receivables Balance)/2 Alternatively, businesses may calculate Accounts Receivable Turnover in a two-step process as follows: 1. Average Sales/Day = Credit Sales or Total Sales/365 2. Average Collection Period = Accounts Receivable/Average Sales/Day The Average Collection Period can then be translated to Inventory Turnover by dividing the number of days a year by the Average Collection Period, Inventory Turnover = Number of days a year/Average Collection Period Add meaning to these numbers by comparing them with the industry averages: The company should monitor Accounts Receivable balances during the year, and compare Accounts Receivable Turnover per quarter and per year to ensure turnover does not decrease from period to period. b. Asset Turnover Ratio The Asset Turnover Ratio measures the number of sales generated from each rand of assets. It is a measure of how efficiently the company has used its assets to generate gross revenue, the higher the ratio the better. It is calculated as follows in two steps: 46
1. Average Assets for Period = (Beginning Assets + Ending Assets)/2 2. Asset Turnover Ratio = Total Revenue/Average Assets for Period The next step, as always when calculating any financial ratio, is to add meaning to this number by comparing it with the industry averages: Companies with lower ratios tend to have higher profit margins since more assets required to generate revenue leads to less competition and the ability to raise prices. Conversely, companies with higher ratios tend to have fewer assets required to generate revenue, and consequently, less barriers to entry. This leads to more competitive pricing and lower profit margins. c. Inventory Turnover Ratio The Inventory Turnover Ratio is used to determine whether or not a business is maintaining adequate levels of inventory and is calculated as follows in two steps. 1. Average Inventory = (Beginning Inventory + Ending Inventory)/2 2. Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory This ratio represents the number of times the inventory is "turned over" during the period we are measuring. Inventory Turnover is generally higher in the retail industry, with grocery stores and retailers of perishable goods having the highest ratios, where profit margins are lower, but sales are made in larger volumes. The ratio should be compared with competitors and the industry average. Another calculation, based on the Inventory Ratio, is to determine how many days it took to clear the inventory. To calculate the number of days, simply divide 365 by the Inventory Turnover Ratio. Evaluating the Profitability of an Organisation a. Gross Profit Gross profit is the difference between Sales and the Cost of Goods Sold. It is a measure of a company's core activities and is an early measure of business strength. Profit Margin = (Sales - COGS)/Sales A strong profit margin is crucial to business success since it represents profit before operating expenses and taxes enter the picture. b. Net Operating Income The next key income statement item is operating income. This is the income after deducting expenses that are necessary for operating the business, such as advertising, 47
Page 1 and 2: CATS Program Commercial Advancement
Page 3 and 4: PART A. PURCHASING MANAGEMENT 1. TH
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Page 9 and 10: 5. STOCK CLASSIFICATION BASED ON TU
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Page 13 and 14: 7. ORDERING SYSTEMS After it was de
Page 15 and 16: Quantity A) Fixed Quantities Orderi
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Page 21 and 22: Cost (R) The decision whether to ma
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Page 33 and 34: We can distinguish between the foll
Page 35 and 36: 6. CREDITWORTHINESS Students unders
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Page 39 and 40: 9. CREDIT SECURITIES Students can d
Page 41 and 42: 5. Lien A lien is the right to hold
Page 43 and 44: When evaluating the Growth of a Bus
Page 45: Investors are either expecting an i
Page 49 and 50: ROE = Net Income/Average Stockholde
Page 51 and 52: XYZ LIMITED GROUP INCOME STATEMENT
Page 53 and 54: INDIVIDUAL ASSIGNMENT: You intend t

Purchasing and Financing 2024

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