Working capital turnover in business has great significance to the success or failure of the enterprise. So What is working capital turnover? What is the formula for calculating working capital turnover? In this post Banktop will help you to solve this problem.
What is working capital?
Working capital Current assets, also known as current assets, are assets with short-term value such as wages, inventory, investments and other short-term capital. In business, working capital is a measure of the available 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 affect the business results a lot. For example, delay in employee salary, unable to import goods to warehouse or unable to expand business with new products.
The more working capital, the easier it is for a business to grow.
Formula to calculate working capital
Working capital = Current assets – current liabilities
- Short-term assets: is an asset owned by the enterprise with a short turnover period, which can be according to the business period or 1 year. Current assets come in many forms such as currencies, commodities, savings, and short-term investments
- Short-term debt: are all expenses that need to be paid within 1 year including debt, short-term expenses...
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What is working capital turnover?
Working capital turnover is understood as the number of days to complete a business cycle, the larger the working capital turnover index, the more stable the business is, and can use working capital effectively.
For example, a business carries out a business from the first step until the product is sold to collect money for reproduction, which means that the business has completed a business cycle, called the capital cycle. mobile.
If the working capital turnover ratio is low, it means that the business cycle can be prolonged due to the phenomenon of inventory… and the business is not operating efficiently.
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What is the formula for working capital turnover?
The calculation of working capital helps the company or business to meet the short-term operating ability of the company or business.
The formula for calculating working capital is as follows:
Working capital turnover = Net sales/Average working capital
- Net Revenue: Is the remaining revenue from the sale of goods after deducting all discounts, taxes, discounts or goods returned in the course of business.
- Average working capital: calculated by year according to the formula (January capital +2 + 3 + …+12)/12
We can see how the working capital turnover ratio is not too difficult to understand, right? But how to manage working capital turnover most effectively, please refer to the next section.
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What does working capital turnover mean?
Based on the results of the working capital turnover calculation, the enterprise can determine whether its business is effective or not? The larger the working capital turnover, the higher the net revenue from sales is on an increasing trend, while the expenses may decrease or stay the same.
Conversely, if the working capital turnover is low, then the company is operating inefficiently.
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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, the enterprise can control its own working capital. These are cash, inventory and backlog management.
This is an important step in capital management. Need to determine how much cash is in the business account? And in it, how much money is used for business purposes or all can be used when needed.
Cash management helps businesses control and plan to use business expenses most effectively.
This is a problem for businesses. If the inventory is too much, it will lead to slow capital recovery, affecting business results and working capital management. It is necessary to limit inventory by reducing overproduction, production without orders.
Management of outstanding debt
This is the job of the debt department and plays a significant part in the management working capital. Good debt collection helps businesses have more cash to add to business capital.
How much working capital turnover is reasonable?
As analyzed above, the higher the working capital turnover, the better the business is developing, the ability to recover capital is fast. On the contrary, if the working capital turnover is low, it means that the business is operating poorly, with slow capital recovery.
Therefore, there is no definitive answer to the question "How much working capital is reasonable?". As long as the business manages the cash, inventory, debt collection issues well, the working capital turnover will increase and help the business become better.
Above is the information to help you answer the question of what is working capital turnover? However, there will be many other indicators that are equally important such as YOY, gross profit ... in business. So let's find out all. Hope this article has brought you useful information.
Reference: What is bad debt?
Information edited by: banktop.vn