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Financial Accounting · Ratios

Efficiency Ratios and the Working Capital Cycle in ACCA Financial Accounting

Updated 11 October 2026 · Fact-checked

Efficiency ratios show how well a business uses its assets and manages working capital. Calculate inventory days, receivables days and payables days using year-end balances over cost of sales, credit sales or credit purchases, times 365. Working capital cycle = inventory days + receivables days − payables days. Asset turnover = revenue ÷ net assets.

Understand Efficiency Ratios and Working Capital Cycle

Efficiency ratios answer one question: how well does the business turn its resources into sales and cash? A business that holds stock for a long time, waits long for customers to pay, or pays suppliers very quickly ties up cash.

Three ratios measure this in days. Inventory holding period is how long inventory sits before it is sold. Receivables collection period is how long customers take to pay. Payables payment period is how long the business takes to pay its suppliers.

The working capital cycle (also called the cash operating cycle) combines them. It is the time from paying cash for inventory to receiving cash from customers. You add inventory days and receivables days, because cash is tied up during both. You subtract payables days, because suppliers finance part of that period. A shorter cycle usually means less cash is locked up. A negative cycle is possible, for example for supermarkets.

Asset turnover measures how many dollars of revenue each dollar of net assets generates. Net asset turnover uses net assets (or capital employed, as the question defines). A higher figure suggests assets are used more efficiently. Compare with prior years and similar businesses, because there is no single good value.

Key formulas to remember

Inventory holding period (days)
Inventory ÷ Cost of sales × 365
Use closing inventory. Cost of sales is the denominator, not revenue.
Receivables collection period (days)
Trade receivables ÷ Credit sales × 365
If credit sales are not given, use revenue and state the assumption.
Payables payment period (days)
Trade payables ÷ Credit purchases × 365
If purchases are not given, use cost of sales.
Working capital cycle (days)
Inventory days + Receivables days − Payables days
Shorter is generally better for cash.
Net asset turnover (times)
Revenue ÷ (Total assets − Current liabilities)
Use the definition in the question. Some questions use net assets = total assets − all liabilities.
Non-current asset turnover (times)
Revenue ÷ Non-current assets
Shows how well long-term assets generate sales.

How to solve Efficiency Ratios and Working Capital Cycle questions

Use this method for any efficiency ratio or working capital cycle question.

  1. 1Read the question and note exactly which ratio is asked for and the units (days, times, rounding).
  2. 2Pick the correct numerator from the statement of financial position: inventory, trade receivables or trade payables.
  3. 3Pick the correct denominator from the statement of profit or loss: cost of sales, credit sales or credit purchases.
  4. 4Multiply by 365 for days ratios, unless the question says to use another number of days.
  5. 5For the cycle, add inventory days and receivables days, then subtract payables days.
  6. 6For asset turnover, divide revenue by the asset base named in the question.
  7. 7Round as instructed and check the answer is sensible, for example days usually between 0 and 200.
  8. 8If asked to interpret, state what the change means for cash, then give a likely cause.

Quickest way: Balance sheet item over flow item, times 365

When to use it: Use in Section A number entry or multiple choice questions where the data is simple and time is short.

  1. Write the three ratios as: inventory ÷ cost of sales, receivables ÷ sales, payables ÷ purchases (or cost of sales).
  2. Underline the matching figures in the question.
  3. Divide first, then multiply by 365, keeping the full calculator figure until the end.
  4. Cycle = first + second − third.
  5. If options are close, recheck whether the denominator should be cost of sales or revenue.

Common mistakes in Efficiency Ratios and Working Capital Cycle

  • Using revenue instead of cost of sales for inventory days.

    Revenue is the most familiar figure and sits at the top of the statement.

    Fix: Inventory is held at cost, so compare it with cost of sales. Say this to yourself every time.

  • Adding payables days in the working capital cycle.

    Students add all three days without thinking about cash flow.

    Fix: Payables days are credit from suppliers, so they reduce the cycle. Subtract them.

  • Using total receivables or payables including non-trade items.

    Taking the current assets or liabilities total instead of the trade line.

    Fix: Use trade receivables and trade payables only, unless told otherwise.

  • Misreading a long receivables collection period as good.

    Students think a bigger number means more sales.

    Fix: A long period means customers pay slowly. It may signal weak credit control, generous terms or bad debt risk, and it ties up cash.

  • Using the wrong asset base for asset turnover.

    Different questions define net assets or capital employed differently.

    Fix: Follow the wording of the question. If unclear, use total assets less current liabilities and state it.

  • Rounding too early.

    Students round each step to save time.

    Fix: Keep full calculator figures and round only the final answer.

Worked examples

Example 1

Year-end figures: revenue $900,000 (all on credit), cost of sales $540,000, purchases $520,000 (all on credit), inventory $60,000, trade receivables $120,000, trade payables $80,000. Calculate the working capital cycle in days, to the nearest day.

Show the solution
  1. Inventory days = 60,000 ÷ 540,000 × 365 = 40.6 days.
  2. Receivables days = 120,000 ÷ 900,000 × 365 = 48.7 days.
  3. Payables days = 80,000 ÷ 520,000 × 365 = 56.2 days.
  4. Cycle = 40.6 + 48.7 − 56.2 = 33.1 days.
  5. Rounded to the nearest day: 33.

Answer: 33 days

Example 2

A company has revenue of $2,400,000, non-current assets of $1,000,000, current assets of $700,000 and current liabilities of $300,000. Calculate net asset turnover, defined as revenue ÷ (total assets − current liabilities), and say what a rise from last year's 1.5 times would suggest.

Show the solution
  1. Total assets = 1,000,000 + 700,000 = 1,700,000.
  2. Capital employed = 1,700,000 − 300,000 = 1,400,000.
  3. Net asset turnover = 2,400,000 ÷ 1,400,000 = 1.71 times.
  4. This is higher than 1.5 times.

Answer: 1.71 times. The rise suggests the company is generating more revenue from each dollar of net assets, so it is using assets more efficiently. Check it is not caused by old, heavily depreciated assets or underinvestment.

Exam tips

  • Check the denominator in every days ratio. Cost of sales, credit sales and credit purchases are different figures.
  • In number entry questions, follow the rounding instruction exactly and use 365 days unless told otherwise.
  • For interpretation, link each ratio to cash: slower collection or faster payment to suppliers changes cash tied up.
  • In multiple response questions, read which direction the change goes before choosing causes, such as longer receivables days from relaxed credit terms.
  • Compare to a prior year or industry average. A ratio on its own says little.

Practice questions from Ratios

Efficiency Ratios and Working Capital Cycle in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Efficiency Ratios and Working Capital Cycle: frequently asked questions

What does a long receivables collection period mean?

It means customers take a long time to pay. This ties up cash and raises the risk of irrecoverable debts. Possible causes are weak credit control, generous credit terms to win sales, or customers in financial difficulty.

How do you calculate the working capital cycle in ACCA FA?

Add inventory holding days and receivables collection days, then subtract payables payment days. Each days figure uses a year-end balance divided by the relevant flow (cost of sales, sales or purchases) times 365.

What is the net asset turnover formula?

Net asset turnover = revenue ÷ net assets, where net assets is often taken as total assets less current liabilities. Use the definition the question gives. The answer is in times.

Is a short payables payment period good or bad?

It means the business pays suppliers quickly. This may earn discounts and goodwill, but it uses up cash sooner and lengthens the working capital cycle. Very long periods may risk supplier relationships.

Can the working capital cycle be negative?

Yes. If payables days are greater than inventory days plus receivables days, the cycle is negative. This happens in businesses that sell quickly for cash and pay suppliers slowly, and it means suppliers are funding operations.