Efficiency ratios tend to be used to assess how well management is controlling key aspects of the business, primarily stock and finances. There are three efficiency ratios:

1. Trade receivable days

2. Trade payable days

3. Inventory turnover

This describes how effectively a company generates products and services related to the amount of time and money needed to produce them. Efficient companies make the most of their resources, transforming labour, materials and capital into products and services that create profit for the company. 

This is calculated using the following formula:

(trade payables/credit purchases) x 365

If you do not know what percentage of purchases were made on credit, then it is acceptable to use the purchases figures as given in the statement of comprehensive income. The ratio measures, on average, how long it takes a firm to pay for goods and services bought on credit; it is expressed as a number of days. For example, if a business has trade payable days of 30 days, this means that , on average that there is a one month gap between the business buying the good or service and paying for it. A business with cash flow problems will try to lengthen its trade payable days.

This is calculated using the following formula:

(average  inventory/cost of sales )x 365

Average Inventory is calculated as follows:

(opening inventory +closing inventory)/2

This ratio measures the average amount of time an item of stock is held by a business and is expressed as a number of days. If a business has an inventory turnover of 7, this means that, on average it holds tock items for one week. The rate of inventory turnover is very much dependent upon the nature of the firm. For example a florist or bakery would have a much lower turnover than a clothes retailer or car showroom. If the inventory turnover is too high for the product this may mean it can go out of date or out of fashion.