![]() ![]() For instance, a low working capital turnover ratio could imply lower sales than expected. Net sales = Gross revenue – Sales return – Discount – Allowancesįor the management of any company, it is imperative to calculate the working capital turnover ratio, as it helps them ascertain the company’s ability to utilise its current funds in facilitating its turnover. Working capital turnover ratio = Cost of goods sold/Working capital Working capital turnover ratio = Net sales/Working capital It can also help to see if a company can pay off the debt in a stipulated period without falling short of funds in times of higher production requirements. In that case, what does a negative working capital turnover ratio mean? It indicates that a company’s operational capacity is not too efficient.Īll in all, a working capital turnover ratio is a great tool to measure a company’s financial and operational performance. Understanding the working capital turnover ratio gives a company an idea of the money it has handy to spend on operations and essential payments once all the debt instalments and bills are paid.Ĭompanies with higher working capital ratios are perceived to be efficient in generating sales and running operations. The main components of this ratio are net sales, cost of goods sold, and working capital. Working capital points toward the relationship between the capital used for financing day-to-day operations and the results the company generates. The working capital turnover ratio measures the efficiency with which a company uses its assets to support sales and business growth. What is the working capital turnover ratio? What does the working capital turnover ratio indicate?.How to calculate the working capital turnover ratio?.Working Capital Turnover Ratio: Quick Notes.What is the working capital turnover ratio?.For example, tightening credit reduces sales, shrinking inventory may also reduce sales, and lengthening payment terms to suppliers can lead to strained relations with them. Management should be cognizant of the problems that can arise if it attempts to alter the outcome of this ratio. The formula is:Īnnualized net sales ÷ (Accounts receivable + Inventory - Accounts payable) ![]() The sales to working capital ratio is calculated by dividing annualized net sales by average working capital. Calculation of the Sales to Working Capital Ratio Such a trend line is an excellent feedback mechanism for showing management the results of its decisions related to working capital. A spike might also be triggered by a decision to keep more inventory on hand in order to more easily fulfill customer orders. A spike in the ratio could be caused by a decision to grant more credit to customers in order to encourage more sales, while a dip could signal the reverse. This relationship can be measured with the sales to working capital ratio, which should be reported on a trend line to more easily spot spikes or dips. Thus, there is typically a ratio of working capital to sales that remains relatively constant in a business, even as sales levels change. There must be an investment in accounts receivable and inventory, against which accounts payable are offset. It usually takes a certain amount of invested cash to maintain sales.
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