The working capital turnover in business has a great significance to the success or failure of the enterprise. So what is working capital turnover?
The working capital formular? In this article, Banktop will work with you to solve this problem.
Table of Contents
What is working capital?
Working capital, also known as working assets, is assets of short-term value such as wages, inventories, investments and some other short-term capital.
In business, working capital is a measure of existing cash to serve business and production activities of the enterprise.
As mentioned above, if the business does not have much working capital during its operation, it will greatly affect its business results.
For example, employees are delayed in salaries, unable to import inventory or expand new product businesses.
The more working capital, the easier it is for businesses to grow their business.
Working capital formular
Working capital = Short-term assets – short-term liabilities
Short-term assets: are assets owned by the Enterprise with a short rotation period, can be according to the business cycle or 1 year. Short-term assets take many forms such as currencies, commodities, savings, and short-term investments
Short-term liabilities: is all expenses that need to be paid within a year including debt, short-term expenses …
What is working capital turnover?
Retained capital turnover is understood as the number of days to complete a business cycle, the larger the working capital turnover ratio shows that the enterprise is operating stably and can use working capital with high efficiency.
For example, if an enterprise conducts business from the very first step to the sale of products and returns money to reproduce, it means that the enterprise has completed a business cycle, called capital return. mobile.
If the working capital turnover ratio is low, it proves that the business cycle can be prolonged due to inventory phenomena … and that the enterprise is not operating effectively.
What is the working capital turnover formula?
Working capital calculation helps companies, businesses have the ability to meet the short-term performance of the company or business or not.
The formula for working capital is as follows:
Working capital turnover = Net revenue / Average working capital
Net revenue: is the remaining revenue from the sale of goods after deduction of any deductions, taxes, discounts or goods returned in the course of business.
Average working capital: calculated by the year according to the formula (capital in January +2 + 3 +… + 12) / 12
We can see that the calculation of working capital turnover is not too difficult to understand. But how to manage working capital most effectively, please refer to the next section.
What does working capital turnover mean?
Based on the results of the calculation of working capital turnover, can the company determine if it is doing business effectively or not?
The larger the working capital turnover, the higher the net revenue in sales is increasing, while the cost can be gradually reduced or unchanged.
Conversely, if the working capital turnover is low, the company is not operating effectively.
How to manage working capital turnover
There are 3 points to note for working capital and if the management of these 3 points is well implemented, enterprises can be able to own working capital by themselves. It’s cash, inventory and outstanding debt management.
This is an important step in capital management. Need to determine how much cash is in the corporate account? And in that, how much money can be used for business purposes or can all be used when needed.
Cash management helps businesses control and plan to use business costs in the most effective way.
This is a problem for Enterprises. If the inventory is too much, it leads to slow capital recovery, affecting business results and working capital management. It is necessary to limit inventory by reducing rampant production, production without orders.
Managing outstanding debt
This is the job of the debt department and plays a significant part in the management of working capital. The good debt collection helps enterprises have more cash to supplement their business capital.
Above is information to help you answer the question of working capital turnover? Hope this article has brought useful information for you.
Positive vs negative working capital
Negative working capital means assets aren’t being used effectively and a company may face a liquidity crisis. Even if a company has a lot invested in fixed assets, it will face financial challenges if liabilities come due too soon. This may lead to more borrowing, late payments to creditors and suppliers and, as a result, a lower corporate credit rating for the company.
Having positive working capital can be a good sign of the short-term financial health of a company because it has enough liquid assets remaining to pay off short-term bills and to internally finance the growth of its business. Without additional working capital, a company may have to borrow additional funds from a bank or turn to investment bankers to raise more money.
Refer: What is bad debts?