![]() A good ratio can even convince investors to provide the necessary funding. This can help an organization stand out among competitors and result in respect and value addition for the company. Similarly to increased overall financial health, a high working capital turnover ratio can enhance a company's overall value within its industry. Related: What Is a Financial Ratio? Enhance a company's value An overall higher working capital turnover ratio results in a higher return on capital employed, which can attract investors and increase the company's chance of expanding. It also helps to prevent running out of working capital and thus having to turn to outside sources and incur debt. Being able to efficiently determine how to use cash most profitably can increase a company's overall financial health. Utilizing a working capital turnover ratio in an organization can make it easier to manage cash outflow and assess cash inflow. Related: What Are Liquidity Ratios? Definition and Example Increase overall financial health This ensures that you know where your cash is going and how to properly allocate it for maximum management and efficiency. ![]() Incorporating working capital management into a business plan can help you stay aware of the status of an organization's accounts payable, accounts receivable and debt and stock management. When a company does not stay on top of its working capital turnover ratio, it may experience insufficient funds for day-to-day operations and short-term debts. Staying aware of an organization's working capital turnover ratio can: Guarantee liquidity Several advantages using a working capital turnover ratio can provide for a business. A ratio of 1.5 to two indicates good liquidity and can help the organization understand its areas of financial success.Īdvantages of the working capital turnover ratio If an organization had a ratio of 0.5, it might evaluate its operations to determine more cost-effective operational solutions. ![]() Analyze the ratioĪ working capital turnover ratio of less than one can indicate potential future liquidity problems. Related: Net Sales: Definition and How To Calculate It 3. This calculation yields a working capital turnover ratio of two. You would take the net annual sales of $16 million and divide it by the working capital of $8 million. Using the same example from step one, imagine that the company has net annual sales of $16 million dollars. Working capital turnover ratio = Net annual sales / Working capital The next step is to use the following formula to determine the working capital turnover ratio: Use the working capital turnover ratio formula ![]() Related: Learn How To Calculate Liabilities 2. Working capital = Current liabilities - Current assets For example, if a company has $10 million in current assets and $2 million in current liabilities, its working capital would be $8 million. You can calculate working capital by subtracting a company's current liabilities from its current assets. Here's how to calculate a working capital turnover ratio: 1. Related: Learn About Being a Finance Manager How to calculate a working capital turnover ratio It can also determine if a company is able to pay off its debt in a set period and ensure it doesn't run out of cash as a result of increased production requirements. Lower working capital turnover is an indicator that there are opportunities for operational improvements.Ī working capital turnover ratio is common for determining a company's financial performance and analyzing its overall operations. This metric gives a company an accurate idea of the money it has available to put towards operations after meeting obligations such as debt payments.Ĭompanies with higher working capital turnover ratios are more efficient in running operations and generating sales. A working capital turnover ratio is important for any business but can be especially crucial for small businesses. In this ratio, working capital refers to the operating funds a company uses in day-to-day operations.Īnother term for this metric is net sales to working capital. What is the working capital turnover ratio?Ī working capital turnover ratio is a metric that calculates how efficiently a company uses working capital to generate sales.
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