It is one of the most critical elements within a company’s operation, as poor working capital management may lead to disaster. The working capital turnover ratio compares a company’s net sales to its net working capital (NWC) in an effort to gauge its operating efficiency. Working capital turnover is a ratio that measures how efficiently a company is using its working capital to support sales and growth. However, an extremely high ratio—typically over 80%—may indicate that a business does not have enough capital to support its sales growth. The indicator is especially strong when accounts payable is also very high, which indicates that the company is having difficulty paying its bills as they come due. On the positive side of the equation, properly managing capital for your enterprise can quickly manifest itself into positive business growth.

Regularly monitor WCTR and adjust strategies as needed to maintain financial health. By implementing JIT inventory practices, negotiating better credit terms, and automating order processing, they reduce their WCTR to 3.8. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

1. Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date.
2. Despite its usefulness, the working capital turnover ratio has limitations.
3. Without it, business owners will likely find themselves in a hairy financial situation where they cannot meet their obligations.
4. The following article will help you understand what working capital turnover ratio is and how to calculate it using the working capital turnover formula.
5. From covering expenses during off-seasons to enabling a business to operate in the event of an economic downturn, high working capital can safeguard against volatility.
6. In summary, mastering the WCTR empowers financial analysts, managers, and investors to make informed decisions.

Related Terms

1. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
2. Remember that the right strategies depend on the company’s unique circumstances, industry, and growth stage.
3. Not only is it simple to calculate, but it gives a very clear indication of how well your working capital is being used to increase your sales and grow your revenue.
4. The researchers found that companies with higher working capital turnover ratios, indicating more efficient use of working capital to generate sales, experienced significantly higher profitability.
5. It signifies how well a company is generating its sales concerning the working capital.
6. The working capital turnover ratio is a financial ratio that assists companies in determining the efficacy of their use of working capital to generate sales.

Working capital, which takes into account a business’s most liquid assets like on-hand cash and immediate debts, can help shed light on short-term financial viability. Your working capital turnover ratio is typically considered high when it is greater than the turnover ratios of similar companies within the same industry. Using your competitors’ turnover ratios is a good benchmark because these companies generally sell products like yours and have a similar business structure. Say that Red Company had a net sales of $500,000 last year and working capital of $50,000. That means the company spent $50, times to generate its $500,000 in sales.

The Working Capital Turnover Ratio Calculation in Practice

The working capital turnover ratio is also known as net sales to working capital. For instance, an NWC turnover ratio of 3.0x indicates that the company generates $3 of sales per dollar of working capital employed. However, unless the company’s NWC has changed drastically over time, the difference between using the average NWC value and the ending balance value is rarely significant. Let us try to understand how to calculate the working capital of an arbitrary company by assuming the variables used to calculate working capital turnover.

Importance of Working Capital Turnover Ratio in Business

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

By analyzing the company’s ability to generate sales from its working capital, investors and managers can better understand the company’s financial health and identify opportunities for improvement. In this article, we’ll take a closer look at the concept of working capital turnover ratio, how it’s calculated, its importance in business, and how it can be used for effective decision-making. The primary application of the working capital turnover ratio is to assess a company’s efficiency in using its working capital to generate sales revenue. Companies with higher ratios are typically more adept at managing their current assets and liabilities to support sales activities.

By dividing revenue by the average working capital, this ratio is able to link the revenue-generating ability to the efficiency of a company’s daily operation. While the working capital metric can be used – i.e. current assets minus current liabilities – the net working capital (NWC) is a more practical measure, since only operating assets and liabilities are included. Like many other metrics, there are limitations to the working capital metric. For example, a company’s assets, working capital turnover ratio such as its accounts receivable, could be overstated to make its financial picture look more appealing. For example, new equipment may improve operations, but its value begins to deteriorate immediately, reducing current assets.

The working capital turnover ratio shows the revenue generated by the working capital of your business. It is a measure of the efficiency with which the business uses its resources. We have prepared this working capital turnover ratio calculator for you to calculate the working capital turnover ratio of any business you like. The working capital turnover ratio formula tells you how much revenue a company can generate given its average working capital. Working capital, which is current assets minus current liabilities, is a balance sheet item that is why it is important to take the average of working capital.

How to calculate working capital turnover? Applying the working capital turnover ratio formula

Working capital is defined as the amount by which current assets exceed current liabilities. Another way to use the working capital turnover ratio is to track its trend over time. By monitoring the ratio over a period of time, businesses can identify if their working capital management is improving or deteriorating. This information can help businesses make informed decisions about their working capital management strategies and take corrective actions if necessary.

A higher ratio generally signals that the company generates more revenue with its working capital. If the inventory level is lesser than the payables, then the working capital is low, which is in this case. Companies focus on inventory management while also paying close attention to accounts payable and accounts receivable to help them efficiently manage their working capital. Working capital turnover ratio is an activity ratio that measures dollars of revenue generated per dollar of investment in working capital.