Stock Turnover Period = Avg. Stock Level X 365
Cost of Goods Sold
1. Measures the speed with which a company turns over its stock
2. Multiplying the ratio by 365 represents this ratio in terms of days that elapse
between the date that goods are delivered by suppliers and dispatched to customers.
I.e. the stock holding period.
3. Companies must strive to keep the stock holding period as low as possible in order
to minimize associated costs.
4. A reduction in the average period for which stocks are held, suggests that the
purchasing, distribution, and selling functions have been streamlined
5. Higher sales and market activity, usually increases the stock figure to ensure that
additional consumer requirements can be met without delay.
6. An increase in sales without a similar increase in stock means that resource which
would otherwise be tied up in stock, is available for use elsewhere in the business.
Rate of Collection of Debtors (Debtor’s Payment Period)
Avg. Trade Debtors X 365
1. The higher the figure, the more it is assumed that money tied up in debts are
resources that are yielding no return and also losing value during a period of inflation.
2. Therefore the reasons for the change should be carefully investigated, to find out
a) There was an increase in the credit period to generate more sales
b) There is slackness in the credit-control department.
3. Please note that the sales figure in the P&L is exclusive of VAT but the debtor’s