What Shows If Your Business Is Actually Any Good? (Debt, Equity And Efficiency Ratios Explained)

The Numbers That Show If Your Business Is Actually Any Good (Efficiency Ratios Explained)

Right, let's go back to when you were 12 or 13 years of age, imagine you were running a lemonade stand. You got the recipe sorted, customers loved it, and you were making decent money. But - were you actually running it well? Like, properly well?

You might have been selling loads of lemonade, but if it took you three months to collect money from customers who said "I'll pay you back, mate," or if half your lemons were going mouldy in storage because you bought way too many, you got a problem. You were making money, sure, but you were doing it in the most inefficient, cash-draining way possible.

This is where efficiency ratios come in. They're basically the report card for how well you're using your resources. At IB Business Management level, examiners absolutely love asking you to calculate these and then suggest ways to improve them. So let's crack on.

Stock Turnover: The "How Fast Can You Shift Your Stuff?" Ratio

Alright, stock turnover (or inventory turnover if you're feeling fancy) tells you how many times a business sells and replaces its stock in a year. Or, flipped around, how many days it takes to sell your average stock.

There are two ways to calculate it:

Option 1: How many times per year

Stock Turnover = Cost of Sales ÷ Average Stock

Option 2: How many days it takes

Stock Turnover = (Average Stock ÷ Cost of Sales) × 365

Where: Average Stock = (Opening Stock + Closing Stock) ÷ 2

IB Business Management Real-life Example: Zara vs. Your Local Jeweller

Let's talk about Zara for a second. Those people turn over their stock 12 times a year. Twelve! That means every single month, pretty much everything in the shop gets sold and replaced with new stuff. The company can move from design concept to store shelf in just two weeks, and they sell 85% of their clothing at full price - incredible numbers these days when you think about it.

Compare that to a luxury jeweller selling Rolex watches. They might only turn their stock over 2-3 times a year, but that's completely fine because each sale makes them a fortune and the products don't go out of style or, you know, rot.

UK supermarkets like Tesco (with £61.45 billion annual turnover) and discount chains like Aldi and Lidl have been expanding aggressively, with Aldi planning to open 40 new stores in 2025. Why? Because their entire business model depends on high stock turnover. Fresh milk doesn't wait around.

When High Stock Turnover is Brilliant

• Supermarkets and fresh food: Your bananas will be brown mush if you don't shift them quick

• Fast fashion: Trends change faster than your brain allows you to think

• Tech: Last year's iPhone is basically ancient history

When Low Stock Turnover is Actually Fine

• Luxury goods: Limited edition trainers, designer watches, high-end cars

• Property developers: You can't exactly knock out houses every fortnight

• Furniture retailers: People don't buy sofas that often

How to Improve Stock Turnover

1. Chuck out the dead stock - That inventory of fidget spinners from 2017? Bin it (or heavily discount it). Get rid of obsolete products that are just gathering dust and costing you money to store.

2. Narrow your range - Stop trying to stock every possible variation. Zara produces items in limited quantities, creating scarcity that makes customers buy immediately rather than wait. Focus on what actually sells.

3. Go Just-in-Time (JIT) - Only order stock when you need it. Scary? Maybe. Efficient? Absolutely. Your warehouse isn't a museum.

Worked Example Time: A business has average stock of £10,000 and cost of sales of £100,000.

• Stock turnover (times) = £100,000 ÷ £10,000 = 10 times per year

• Stock turnover (days) = (£10,000 ÷ £100,000) × 365 = 36.5 days

So they're selling and replacing their entire stock every 36-37 days. Not bad!

Debtor Days: The "How Long Until People Actually Pay You?" Ratio

This one's dead simple but absolutely crucial. Debtor days tells you how long it takes, on average, to collect money from customers who bought stuff on credit.

Debtor Days = (Debtors ÷ Total Sales Revenue) × 365

The lower the number, the better. Why? Because every day someone owes you money is a day you don't have cash to pay your bills.

IB Business Management Real-life Example: The Boohoo Situation

In early 2025, fast-fashion retailer Boohoo extended payment terms for some UK suppliers from 30 to 45 days, and international suppliers from 75 to 90 days. One supplier told reporters, "This will impact our business, especially as it's difficult to get credit insurance on Boohoo at the moment."

That's the drawback of debtor days - your debtor days are someone else's creditor days (more on that in a minute). When you take ages to collect payments, your own cash flow suffers. In 2024, the then-Boohoo Group withheld payment to some suppliers after alleging goods didn't meet standards, and suppliers reported being owed hundreds of thousands of pounds.

See the problem? Customers aren't paying you, but your suppliers still want their money. Cash flow crisis incoming.

How to Improve Debtor Days (Get Your Money Faster)

1. Offer cash discounts - "Pay within 10 days and get 2% off!" Suddenly everyone's got their wallets out.

2. Tighten credit terms - Maybe 60-day payment terms were too generous? Drop it to 30.

3. Actually chase the money - Send reminders. Make phone calls. Be polite but persistent. That invoice won't pay itself.

4. Credit check your customers - Only offer credit to people who've got a track record of actually paying their bills.

The industry average for debtor days varies, but the overall median across industries is 56 days, with clothing and home goods companies recording the lowest median debtor days due to their dependency on physical inventory and requiring faster post-transaction payments.

Creditor Days: The "How Long Can You Delay Paying Your Bills?" Ratio

Now we're on the other side. Creditor days measures how long you take to pay your suppliers.

Creditor Days = (Creditors ÷ Cost of Sales) × 365

You generally want this number to be higher than your debtor days. Why? Because if customers pay you in 30 days but you can pay suppliers in 60 days, you've got cash sitting in your account for 30 days. Free money to use!

But... delay too long and you'll damage relationships with suppliers, possibly face late payment charges, or they might just refuse to work with you altogether.

What is Reasonable?

Trade credit is typically 30-60 days, which is considered acceptable. The key is this: Creditor Days should be longer than Debtor Days (if possible) to improve your net cash flow.

If your debtor days are 45 and creditor days are 60, you're golden. If it's the other way around (collecting in 60 days but paying in 30), you've got a cash flow headache.

How to Improve Creditor Days

1. Negotiate extended terms - Ask your suppliers for longer payment periods. The worst they can say is no.

2. Find better suppliers - Shop around for suppliers offering better credit terms.

3. Consider paying cash instead - Wait, what? Sometimes paying cash gets you better prices or discounts that outweigh the benefit of delayed payment.

Gearing Ratio: The "How Much Are You Relying on Debt?" Ratio

Right, gearing. This one's about your capital structure - basically, how much of your business is funded by borrowing (debt) versus how much is funded by owners' money (equity).

Gearing Ratio = (Non-current Liabilities ÷ Capital Employed) × 100

Where: Capital Employed = Non-current Liabilities + Equity

High Gearing vs. Low Gearing

Highly geared = Loads of debt. Risky during a recession, vulnerable to interest rate rises, but can fuel rapid growth.

Low gearing = Mostly equity-funded. More financially stable, less risky, but might be missing growth opportunities.

IB Business Management Real-life Example: Tesla The Gearing Turnaround Story

Let me tell you about Tesla because it's a great example of how gearing can change dramatically. Tesla's debt-to-equity ratio declined significantly from 0.53 in 2020 to just 0.07 in 2022, indicating a major reduction in reliance on debt financing. By 2024, it had ticked up slightly to 0.11, but still remained very low.

Point is, Tesla went from being quite heavily geared to having one of the lowest debt ratios in the automotive industry.

How? Rising share prices and increasing profitability allowed Tesla to restructure its capital framework, leaning more heavily on equity-based funding rather than debt. When your shares are worth loads, you don't need to borrow as much.

When is High Gearing Actually Okay?

Here's the thing examiners want you to know: high gearing doesn't automatically mean "bad."

If you're a growing business with solid revenue, low interest rates, and big expansion plans, borrowing can make perfect sense. The debt finances growth, which generates more profit, which pays off the debt. Sorted.

It's only a problem when:

• Interest rates spike and your repayments become crippling

• A recession hits and your revenue drops but debt payments stay the same

• You can't generate enough profit to service the debt

How to Reduce Gearing

1. Pay off some debt - Obvious but effective. Use profits to reduce your non-current liabilities.

2. Improve working capital - Better stock control and faster debtor collection generates cash you can use to pay down debt.

3. Use internal finance - Retained profits and share capital instead of loans for your next expansion.

Why Efficiency Ratios Are Relevant

Here's what you need to understand for your exams (and for life, frankly): profitability and efficiency go hand-in-hand.

You can have brilliant profit margins, but if your cash is tied up in stock no one's buying, or customers who aren't paying you, or if you're drowning in debt repayments, you're going to struggle. Fast fashion brands with turnover ratios around 12 annually have reduced markdowns by about 15% because faster-moving stock needs fewer discounts to clear shelves.

Think about it this way:

• Stock turnover = How quickly you convert inventory into cash

• Debtor days = How quickly you convert sales into cash

• Creditor days = How long you can delay cash leaving your business

• Gearing = How much financial risk you're carrying

Master these, and you're understanding how businesses actually survive and thrive in the real world.

Stay well,