Understand inventory and receivables turnover

2.5.8 · Stock-Market › Financial Ratios

Overview

Inventory turnover aur receivables turnover efficiency ratios hain jo measure karte hain ki ek company apne working capital assets (inventory aur credit sales) ko kitni jaldi cash mein convert karti hai. Ye ratios batate hain ki company operationally efficient hai ya capital slow-moving goods ya unpaid invoices mein trapped hai.

Ye kyun matter karte hain: High turnover = fast cash cycles = kam capital locked up = better liquidity. Low turnover operational problems, obsolete inventory, ya weak credit policies ka signal deta hai.

Core Concepts

###1. Inventory Turnover Ratio

Derivation from First Principles

YE FORMULA KYUN?

Step-by-step socho:

1. COGS = Saal ke dauran bichi inventory ki total cost (revenue nahi, kyunki hum goods mein lagi cost chahte hain)
2. Average Inventory = (Beginning Inventory + Ending Inventory) / 2 = Maintain ki gayi typical inventory level
3. The ratio = COGS / Avg Inventory = "Humne apna average stock kitni baar becha?"

Example walkthrough:

• Saal ka COGS = ₹12,000
• Beginning inventory (Jan 1) = ₹1,00,000
• Ending inventory (Dec 31) = ₹1,40,000
• Average inventory = (1,00,000 + 1,40,000) / 2 = ₹1,20,000

$\text{Inventory Turnover}=\frac{12,00,000}{1,20,000}=10\text{ times/year}$

YE STEP KYUN? Hum annual biche hue goods ko average stock level se divide karte hain. Ye batata hai ki inventory 10 baar "turn over" hui (fully replace hui).

$\text{DIO}=\frac{365}{10}=36.5\text{ days}$

Interpretation: Average par, inventory bechne se pehle 36.5 din shelves par rakhti hai.

2. Receivables Turnover Ratio

Derivation from First Principles

YE FORMULA KYUN?

1. Net Credit Sales = Credit par ki gayi sales se revenue (cash sales nahi, kyunki receivables sirf credit se aati hain)
2. Average Accounts Receivable = (Beginning AR + Ending AR) / 2 = Typical outstanding credit balance
3. The ratio = Sales / Avg AR = "Humne full AR balance kitni baar collect kiya?"

Example walkthrough:

• Annual credit sales = ₹24,00,000
• Beginning AR (Jan 1) = ₹2,00,000
• Ending AR (Dec 31) = ₹2,80,000
• Average AR = (2,00,000 + 2,80,000) / 2 = ₹2,40,000

$\text{Receivables Turnover}=\frac{24,00,000}{2,40,000}=10\text{ times/year}$

YE STEP KYUN? Hum annual credit sales ko average amount se divide karte hain jo customers par baaki hai. Ye batata hai ki humne "full AR balance" 10 baar collect kiya.

$\text{DSO}=\frac{365}{10}=36.5\text{ days}$

Interpretation: Customers apne invoices pay karne mein average 36.5 din lete hain.

Worked Examples

Common Mistakes

Active Recall Questions

#flashcards/stock-market

Inventory turnover kya measure karta hai? :: Kitni baar ek company ek period mein (typically 1 saal) apni poori inventory bechti aur replace karti hai. Higher turnover = faster sales = kam capital locked up.

Days Sales Outstanding (DSO) kya hai? :: Credit customers se payment collect karne mein average kitne din lagte hain. DSO = 365 / Receivables Turnover. Lower DSO = faster collections.

Inventory turnover ke liye revenue ki jagah COGS kyun use karte hain? :: Kyunki inventory cost par record hoti hai, selling price par nahi. Cost (inventory) ko revenue (sales price) se milana invalid ratio banata hai. COGS cost basis se match karta hai.

Intuitive Understanding

Connections

• Cash Conversion Cycle: Inventory + Receivables turnover teeno components mein se 2 hain (teesra payables hai). Milkar ye determine karte hain ki capital kitne der ke liye tied up hai.
• Working Capital Management: Ye ratios directly working capital efficiency measure karte hain. High turnover = kam working capital needed.
• Current Ratio and Quick Ratio: High inventory turnover liquidity ratios improve karta hai (kam dead inventory). High DSO quick ratio ko hurt karta hai (AR "quick" nahi hai agar collect hone mein 90 din lagte hain).
• Return on Assets (ROA): Faster turnover → same revenue with less asset investment → higher ROA.
• Operating Cash Flow: Slow inventory aur receivables turnover operating cash flow reduce karta hai. Cash assets mein locked hai liquid hone ki jagah.
• Industry Analysis: Turnover benchmarks sector ke hisaab se bahut vary karte hain. Hamesha same industry ke andar compare karo.
• Credit Policy: DSO directly tumhare credit terms aur enforcement ko reflect karta hai. Tight policy = low DSO, lenient policy = high DSO.

Key Takeaways

1. Inventory Turnover = COGS / Avg Inventory. Measure karta hai ki tum kitni jaldi stock bechte aur replace karte ho. DIO = 365 / Turnover (kitne din inventory rakhti hai).

2. Receivables Turnover = Credit Sales / Avg AR. Measure karta hai ki tum payment kitni jaldi collect karte ho. DSO = 365 / Turnover (collect karne mein kitne din).

3. Hamesha averages use karo (Beginning + Ending) / 2 balance sheet items ke liye. Snapshots jhooth bolte hain; averages real working capital reveal karte hain jo maintain kiya gaya.

4. Higher turnover = zyada efficient, lekin context matter karta hai. Industry norms se compare karo. 0.5× par ek aircraft maker 15× par ek grocery store se better ho sakta hai.

5. Ye ratios cash problems diagnose karte hain: Low inventory turnover = capital shelves mein frozen. High DSO = cash unpaid invoices mein atka. Dono liquidity hurt karte hain.

Concept Map