Analyze how well your working capital supports your sales volume
Revenue
Working Capital Components
Working Capital Turnover
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What is Working Capital Turnover?
This ratio measures how efficiently a company is using its working capital to generate sales. Working Capital is the difference between your current assets and current liabilities. A high turnover ratio shows that management is very efficient in using a company’s short-term assets and liabilities for supporting sales. The formula is: $$Working\ Capital\ Turnover = \frac{Net\ Sales}{Current\ Assets - Current\ Liabilities}$$
- High Ratio: Indicates that the business is running smoothly and requires minimal further investment. The "money" is moving through the business quickly.
- Low Ratio: Suggests the business is investing in too many accounts receivable and inventory to support its sales, which could lead to a "cash crunch."
- Negative Working Capital: If your liabilities exceed your assets, the turnover ratio becomes negative. While common in some retail models, it usually signals financial distress.
What is a "Good" Working Capital Turnover? +
Generally, a higher ratio is better, but it varies by industry. A ratio between 1.5 and 2.0 is often considered a healthy baseline for many sectors.
Can the ratio be too high? +
Yes. An extremely high ratio might indicate that a company does not have enough capital to support its sales growth, potentially leading to "overtrading" and eventual insolvency.
How can I improve this ratio? +
You can improve it by speeding up collections from customers, managing your inventory more tightly, or negotiating better payment terms with your suppliers.
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