To calculate the working capital turnover ratio, all you need to do is divide the net annual sales by average working capital. The working capital turnover ratio reflects the business’s efficiency in producing sales profit by making use of the entire working capital available in the business throughout a specific time period.
A higher working capital turnover ratio is usually an indication that your business is producing more profits through its working capital. Since the current assets are greater than the present liabilities, the working capital will be positive. In case the level of inventory is lesser than the payables, then that means the working capital is low.
Working Capital Turnover Ratio Benefits
Raises overall financial health
Making use of a working capital turnover ratio can aid you in handling your cash outflow well and reviewing cash inflow. If you are able to efficiently find out how to utilize cash most gainfully, you can raise your business’s overall financial health. It even aids to avert running out of working capital and therefore needing to turn to external sources and acquire debt. However, you can always avail of a business loan in Delhi.
Averts operation disruptions
Knowing your business’s working capital turnover ratio can aid in averting any disruptions within your company’s daily operations by giving info to managers that facilitate them to use funds most proficiently. Making use of the working capital proficiently for maintaining operations can lessen potential obstructions in productivity and keep your business as lucrative as possible.
Increases the value of the business
A high working capital turnover ratio can increase the overall value of a business. This can aid the company in being prominent among its competitors. Also, it can add more esteem and worth to the company.
Assures liquidity
While a business doesn’t remain on top of its working capital turnover ratio, it might experience inadequate funds for daily operations and temporary debts. Integration of working capital management into your enterprise can assist you in staying aware of the condition of your enterprise’s accounts receivable, accounts payable, etc. This guarantees that you know where your money is being spent and how to allot it appropriately for maximum management and productivity.
Drawbacks of Working Capital Turnover Ratio
Since many benefits can result from estimating your business’s working capital turnover ratio, it is critical to take into account that there are possible drawbacks, as well. Here are the challenges that might occur while making use of the working capital turnover ratio within your business’s financial analysis.
A high working capital turnover ratio can be negative
When having a high working capital turnover ratio might seem positive, this is not the situation every time. If you have a high working capital turnover ratio, it can signify that your business doesn’t have adequate working capital to maintain the sales augmentation.
This can result in the business turning out to be in debt in the future if it doesn’t adjust its working capital to sales ratio. If you estimate the working capital turnover ratio of your business and find out that it is too high, you might have to evaluate your financial condition and make suitable adjustments to prevent failure.
Only depends on economic factors
A working capital turnover ratio only considers the economic factors of a business. Since economic factors are undoubtedly crucial, non-monetary influences can affect a business’s financial health, too. The working capital turnover ratio formula doesn’t consider displeased workers or periods of downturn.
About Working Capital Loan
A working capital loan aids an enterprise in financing its short-term or daily operations. This loan can be utilized for a number of purposes. A working capital loan is generally not utilized for long-term assets or investments. However, it can be utilized for covering the day-to-day expenditures of an enterprise.
It is a one-stop solution for seasonal businesses because they can utilize the needed finances while the business activities are less. This loan has many uses, counting the purchase of inventory, purchase of raw materials, and paying overhead expenses like rent, utility bills, etc.
Likewise any other business loan, this loan also has certain eligibility criteria. Check your eligibility and opt for this business loan apply online.
