3.6.2 (HL)—Improving efficiency ratios

Efficiency improves when a business converts stock into sales, collects receivables or uses capital with less waste and risk. The action should target the ratio’s mechanism, not simply make the number larger or smaller.

Faster invoicing and credit checks can reduce debtor days; better stock forecasting and smaller, more frequent orders can improve stock turnover; negotiated supplier terms can raise creditor days. Each choice changes relationships, service, cost or resilience.

A retailer may clear slow stock and automate reminders, but discounting too heavily can reduce margin and pressuring a key supplier can lose trade credit. Lower gearing may reduce risk while also limiting funds for productive expansion.

A ‘better’ ratio is context-dependent: high creditor days may be late payment, and fast stock turnover may reflect stockouts. Check the target, side effects and cash-flow evidence before recommending a change.