Working capital = current assets - current liabilities The formula to calculate the working capital is: For instance, if your company has current assets worth Rs 1 Crore and your current liabilities are Rs 20 Lakh, your working capital would be Rs 80 Lakh. You can calculate your company's working capital by subtracting your current liabilities from current assets. Now that you know the working capital turnover formula, here is a stepwise process to calculate the working capital turnover ratio: How to Calculate Working Capital Turnover Ratio? Working Capital Turnover Ratio = COGS / Working CapitalĪnd, COGS = Opening Stock + Purchases – Closing StockĬompany owners can derive the information related to their average working capital from their closing or beginning balance sheets. Working Capital = Current Assets - Current Liabilities Working Capital Turnover Ratio = Net Annual Sales / Working Capital Therefore, the working capital turnover ratio formula is as follows: Some believe the COGS is more directly related to a company’s efficient use of the working capital. Some analysts also use the COGS (Cost of Selling Goods) instead of net sales to calculate their working capital turnover ratio. You can calculate the net sales by subtracting customer returns from your company’s gross sales during a period. The working capital turnover formula contains two crucial elements: net sales and working capital. Calculating Working Capital Turnover Ratio Based on this parameter, company owners also decide whether they can pay off their debt before the due date without running out of cash due to high production requirements. Companies commonly use this ratio to determine their financial performance and analyse their overall operations. On the other hand, a lower turnover ratio indicates opportunities for improvement. A company with a higher turnover ratio demonstrates higher efficiency in generating sales and conducting regular operations. It accurately presents an idea of the funds available for everyday operations after fulfilling debt payments and other financial obligations. Another crucial metric in this aspect is the net sales to working capital.Ī working capital turnover ratio holds great importance for businesses, especially for small-sized enterprises. In this variable, net working capital refers to a company’s operating cash that it uses to conduct its day-to-day operations. What is Working Capital Turnover Ratio?Ī working capital turnover ratio is a parameter to calculate how efficiently an organisation generates sales using its net working capital. In this article, we will explain what a net working capital turnover ratio is, the formula to calculate it, and discuss its advantages with an example. Calculating this ratio helps you determine the liquidity state of your company and adequately optimise the operations. It is a vital metric that analyses how effectively your organisation converts your cash into sales. If you want to measure how efficiently your company performs and makes money, you can get a data-based idea by calculating its working capital turnover rate. Here is how to calculate the working capital turnover ratio, its advantages, and how to calculate it. Working Capital Turnover Ratio indicates a company’s efficiency in using its available working capital and displays the relationship between its funds and revenues.
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