What is the concept of working capital turnover? How does it affect the business? Is working capital turnover really important to the business? Let’s learn more about working capital turnover (VQVLD) with JES in this article, as well as how they are calculated and their influence.
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What is working capital turnover
?Working capital turnover (VQVLD) is the time it takes to complete a business cycle of an enterprise. Its role to show the business situation of the company. The larger the turnover ratio, the more evidence that the business has good and effective use of working capital.
On the contrary, a deep working capital cycle shows that the ability to produce and circulate goods, as well as the ability to recover capital, of the enterprise is slow, leading to the comment that the company’s revenue is not growing.
Working capital turnover of enterprises operating in the commercial sector is usually higher than that of enterprises operating in the basic manufacturing sector. This shows that depending on different business areas, the working capital turnover of each business will also be different.
Working capital turnover formula
Working capital formula
Working capital = Current assets – current liabilities
Current assets are assets that the business can convert into cash within 12 months. Current liabilities: are debts that the business needs to pay within a period of one year.
Formula to calculate working capital turnover
Working Capital Turnover = Net Sales/Average Working Capital
Calculated average working capital = (Working capital January + February…December)/12Net revenue is the amount of sales that have been deducted from sales deductions.
Working capital turnover in the enterprise
Working capital turnover in a business usually depends on each field, which will have different changes. Therefore, the coefficient of working capital turnover is also different.
For businesses in the commercial sector, the working capital cycle is larger than for those in the manufacturing sector.
Assessment of working capital turnover
To be able to accurately and specifically assess the working capital turnover of a business, it is necessary to use the following indicators:
Industry averagesSales policyProduct valueConsumptionabilitySellability of products and goods.
From these indicators, it is possible to evaluate the working capital turnover ratio, know whether the business situation of the enterprise is effective or not.
Time of VQVLD
In addition to the working capital turnover ratio, another indicator that you need to pay attention to is the time of a working capital turnover. This ratio shows the average time of a working capital turnover during the period. In contrast to working capital turnover, the smaller the working capital turnover period, the better. It proves that the working capital turnover speed of the enterprise is fast, as well as the shortened capital turnover time.
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Working capital turnover management
In working capital we should pay attention to 3 items mentioned in the section below. Those 3 categories are Inventory Management – Cash Flow Management – Outstanding Debt Management. Let’s take a closer look at the 3 items below.
Cash flow management
Cash flow is an extremely important asset for every organization and business. It is likened to the blood that nourishes the human body, as well as if the blood is not circulated well, it will cause people to suffer from tuberculosis and dizziness.
Cash flow too, they help the company coordinate all activities. The accounting department needs to control the amount of money currently in the company’s account. Determine how much money is used for production and business purposes, and how much money is expected to arise for necessary problems so as not to affect the working capital round.
Inventory is an inevitable part of a manufacturing or importing business. If there is inventory, then the goods will be available to supply to the market as quickly as possible.
However, stagnant inventory will cause businesses to lack capital, affecting working capital turnover.
Because this will lead to slow capital recovery and business stagnation, capital is not flexible.
Therefore, the inventory problem should be noted and reminded based on new updates of Supply & Demand in the market. Inventory should be limited by reducing overproduction and no-order production.
Management of outstanding debt
Outstanding debts are the dangers that easily arise into bad debts. Bad debts within a certain period of time will be converted to bad debts. This will cause the working capital flow to be severely affected if the business does not take measures to handle it thoroughly.
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What is a reasonable amount of working capital turnover
To answer this question is really difficult. Because the higher the working capital turnover then, it shows that the business is developing well, the capital is recovered quickly, and vice versa, if the working capital turnover is low, it shows that the business is not developing well, and the ability to recover capital is slow. So as long as the business manages the cash issues, debt collection issues, inventory, of course the working capital turnover will increase.
SUMMARY: The information shared about working capital turnover above hopes to help readers somewhat better understand the importance of working capital in a business.