![]() The objectives of a working capital management strategy for a business are to ensure the liquidity and the profitability of the business. Moreover, the additional debt and interest payments can also affect the profits of the business. This can further force the business into cash flow problems and compel the business to obtain debt. ![]() For example, if the inventory turnover period of a business increases, it may affect the sales and receipts of the business and cause a delay in paying the liabilities of the business. If either of these two areas of a business is mismanaged, the strategy can fail. The effectiveness of the working capital management strategy of a business relies on its management of its current assets and current liabilities. READ: Types of Errors in Accounting: All You Should Know! Some businesses cease their operations because of an ineffective working capital management strategy, although they are profitable. It is one of the fundamental strategies of a business as it dictates the long-term stability of the business. The working capital management strategy is used to keep the operations of a business running smoothly. As established above, the working capital turnover ratio can be used as an appraisal tool for the working capital management strategy of a business. Working capital management is the strategy set by the management of the business to regulate the working capital of a business. This helps smaller businesses establish an estimate of its resources that are available for use. This is because the ratio allows small businesses to determine the amount of resources it can dedicate towards the operations of the business after any current liabilities have been paid off. The working capital turnover can also be a critical ratio for small business. These similar businesses may include competitors of the business or other businesses in the same industry. Investors also use it to compare the performance of the business with similar businesses. Usually, a business that can generate a higher turnover with limited resources is preferred by investors as it shows the management is capable of generating sales with limited resources. We also can use it to evaluate the overall performance of a business in its daily operations.įurthermore, investors look at the working capital turnover ratio of a business to assess the ability and competence of the management of the business. It also helps in determination of the business’ ability to pay off its debts and keep its cash reserves readily available. It can be used to determine whether a business can use its working capital to its maximum capacity. Since the working capital turnover ratio of a business also takes into account the working capital of a business, it can be a key indicator of the ability of the business to manage its working capital. The working capital turnover ratio is one of the key ratios used to evaluate a business’ financial performance. Importance of Working Capital Turnover Ratio Calculation It represents the operating capital of a business that is used in its daily operations. ![]() Typically we use working capital to measure the liquidity of the business. The current liabilities of a business comprise of any short-term obligations, for example, accounts payable, short-term loans, etc. These current assets of a business comprise of inventory, receivables and any cash and cash equivalents. The working capital of a business is the remaining current assets of a business after subtracting all its current liabilities from it. The turnover of a business, for profit-making businesses, is one of the major indicators of a business’ performance and profit generation capacity. The turnover of a business is its total revenue or sales it generates from selling products to its customers. The ratio can be used to evaluate the efficiency of a business in using its resources. It is a measure of the ability of a business to use its working capital to support its turnover, or revenues. The working capital turnover ratio is a ratio of the turnover of the business to its working capital. ![]()
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