Stock Turnover: Measuring Operational Efficiency

Study Notes

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 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.