Stock Turnover: Measuring Operational Efficiency

Stock Turns

• Stock turn is a measure of operational efficiency and indicates how many times stock or inventory is sold and purchased over a given time period.
• A low turnover rate may indicate overstocking, obsolescence, or deficiencies in the product line or marketing effort.
• A slowing down of stock turns may indicate:
  • Large amounts of obsolete stock or raw materials that are not being used.
  • Over-ordering and building up a stockpile of unnecessary products.
  • Sales have slowed, resulting in spare product or raw materials.
  • Issues with shrinkage (wastage or theft).
• Actions to reverse this trend include:
  • Conducting a stock audit to identify and clear unsold stock.
  • Using stock inventory software to track unsold products.
  • Tightening up on security access to prevent shrinkage.

Credit Management

• Credit management involves granting credit, setting terms, recovering credit, and ensuring compliance with company credit policy.
• Objectives of credit management include:
  • Maintaining strong cash collections.
  • Scrutinizing accounts receivables portfolio and warning signs.
  • Defining credit levels for various customers.
  • Preventing non-payment and delayed payments.
• Importance of credit management:
  • Prevents cash crunches and bankruptcy.
  • Ensures optimal credit policy to overcome cash management problems.
• Determination of credit rating of a customer involves:
  • Assessing credit risk by studying credit payments.
  • Maintaining and building customer relationships.
  • Detecting late payments in advance.
  • Preventing and avoiding bad debts.

Problems Arising from Improper Credit Management

• Cash crunches in business.
• Increase in bad debts.
• Increase in debts to creditors.
• Inadequate working capital.
• Affecting day-to-day operations.
• Low cash conversion or cash inflow.
• Losing credit rating.
• Unable to take benefits of cash discount from suppliers.

Advantages of Credit Management

• Increases cash conversion or cash inflow.
• Reduces bad debts.
• Increases profitability.
• Increases liquidity.
• Helps to increase production level and lower costs.
• Builds credit rating and brand reputation.
• Ensures efficient management of working capital.