Productivity ratios

This is the other factor, which determines overall profit. It can be regarded as the level of sales obtained from the assets employed by the business - obviously the higher this is the better from the viewpoint of the business.

Sales per employee is used to measure the productivity of the employee of the business. The effective use of labour is one of the key tasks of the management of the business, so this is an important ratio. It is also relevant to employees as it does reflect their efforts during the accounting period.

Assets turnover expresses the number of times the value of assets utilised by the business have been covered by sales.

Stock turnover is an important measure of the effective use of stock by the business. The adequacy of the ratio will depend upon the type of industry. For example, a supermarket is likely to turn over or sell its stock much more quickly than an engineering company carrying a wide range of components. If the turnover is declining them the reasons should be investigated. Possible factors would include:

• a lager amount of slow-moving or obsolete stock

• higher levels of stocks being held

• lack of control over purchasing

• a wider range of products being stocked

Note that the average stock is usually calculated as the total of the opening stock plus the closing stock divided by two.

Debtor turnover/debtor collection period assess the speed with which a business collects amounts owing from customers. The higher the turnover rate or the lower the collection period the more effective is this control of credit. The average day's sales is usually calculated by dividing sales by 365, the number of days in the year. Most firms operate on a normal credit period to customers of thirty days. An acceptable debtor collection period might therefore be something like fifty days. Very high collection periods would indicate that the credit control system needs to be improved and that either incentive should be given to customers or effective sanctions applied against slow payers.

Case study 3. Define the ratios which represents an improvement in the productivity of a business in the second year.

1St year 2nd year

(a) Sales per employee $3,500 $5,000

(b) Asset turnover 4Times 3,9times

(c) Stock turnover 12 times 13,2 times

(d) Debtor Collection period 64 days 62 days

TASK 4. Translate into English.

Liquidity ratio

Способность предприятия оплатить свои долги текущими резервами показывают два коэффициента.

Коэффициент ликвидности показывает отношение всех оборотных активов к краткосрочным обязательствам и указывает на то, может ли

предприятие выполнить свои обязательства. Для нормальной работы предприятия требуется отношение 1,8 : 1. Более высокий коэффициент предполагает вложение слишком больших средств в оборотные активы, в то время как низкий коэффициент является показателем опасности банкротства в случае необходимости быстрого платежа.

Запасы исключаются из оборотных активов для определения коэффициента срочной ликвидности. Это необходимо, так как на некоторых предприятиях продажа запасов может занять продолжительное время. Приемлемым является отношение 0,8 :1.

TASK 5. Translate into Russian. Answer the following questions.

1. What shows the profit of shareholders in a business?

2. Who invests in a business on the long-term basis?

3. What rate of gearing is suitable for prospective lenders?