Every business requires capital to generate revenue. Capital refers to the investment required to run an enterprise. Calculations based on the total sales and the money available for the business reveals crucial information regarding the success or failure of the said business. Working capital turnover ratio is one such calculation, which can determine the profitability of your business.
The simplest way to calculate this ratio is to divide your total sales for a given period with the average working capital available to your business at the same time. Here is a broader look at what net sales and average working capital mean.
Any sales that your business makes during a specific period are known as gross sales. From this figure, if you subtract those sales where customers return the product, you will derive the net sales.
For example, let’s consider a company manages to generate sales of Rs. 20 Lakh in a year. It is the gross sales for the company. Now, out of this Rs. 20 Lakh, customer returns accounted for a loss of Rs. 2 Lakh. Therefore, net sales for the company within that year would be Rs. 20 Lakh – Rs. 2 Lakh = Rs. 18 Lakh.
Working capital refers to the total assets minus gross liabilities for your business during a specific period. For the success of any business, it is essential to know how much working capital is needed. To calculate working capital turnover ratio, however, you need to calculate the average working capital for a given period. To do this, add the working capital at the start of a period with the working capital at the end of that period. Divide this total by 2.
For example, if your business’s working capital at the start of a year is Rs. 10 Lakh and by the end of the same year, it is Rs. 8 Lakh. Then your average working capital for that year is 10+8= 18/2, or Rs. 9 Lakh.
Now that you know the working capital meaning and the procedure to calculate the net sales, here is how you can calculate the turnover ratio for the business mentioned above.
Working capital turnover ratio = Net sales/Average working capital
Therefore, the shoe company’s turnover ratio= 18/9, or 2:1.
If you are operating a business, your turnover ratio determines the efficiency of your business to use the capital available. Therefore, higher working capitals are preferable for companies.
However, too high ratios indicate the absence of enough working capital for the smooth operation and growth of any business. In such a case, the company runs the risk of becoming insolvent, lacking higher investments.
Business loans with competitive interest rates and flexible tenor are the simplest source of funds to expand your organisation’s working capital. Access to business loans up to Rs. 30 Lakh has made it easier for smaller business to operate and ensure liquidity.
Here are some features of business loans that make them ideal for a company’s growth.
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