What is working capital turnover? This is an important indicator that helps businesses evaluate the efficiency of short-term capital use, thereby optimizing business operations and cash flow management. In addition, understanding what net working capital is also helps accountants and business owners grasp the liquidity and financial security of the business.
In this article, we will guide you in detail on how to calculate working capital turnover, analyze the meaning of each index, and provide practical examples for you to apply effectively in business financial management.
1. What is working capital turnover?
Concept: Working Capital Turnover is a financial ratio that measures how efficiently a business uses its working capital. working capital to generate sales. This ratio shows how much sales each dollar of working capital used generates.
Meaning of the index:
- High index: Shows that the business is using working capital effectively to generate revenue, each dollar of capital used generates high sales.
- Index too high: It could be a warning sign that the business is lacking working capital to support operations, or is trying to generate revenue with too little capital.
- Low index: Conversely, it suggests that the business may be overinvesting in receivables and inventories, leading to the risk of bad debt or overstocking.
What is the reasonable working capital turnover?
- Under 1: Potential risks of liquidity and short-term debt payment ability.
- 1.5 – 2: Considered a stable level, showing that the business has the ability to use capital effectively and maintain continuous business operations.
- Over 2: It is important to consider carefully, as the business may be lacking working capital to support operations, or is trying to generate revenue with too little capital.
Illustration:
Suppose, in the last fiscal year, ABC company's net revenue was VND 800 billion. The working capital at the beginning of the period was VND 100 billion and the working capital at the end of the period was VND 120 billion. To calculate the working capital turnover, we will perform the following steps:
- Determine net revenue: ABC company's net revenue for the year was 800 billion VND.
- Calculate average working capital:
Average working capital = (100 + 120) / 2 = 110 billion VND - Calculate working capital turnover:
Working capital turnover = 800 / 110 ≈ 7.27
Thus, the working capital turnover ratio of ABC company is approximately 7.27. This means that each dollar of the company's working capital was turned over 7.27 times during the year to generate revenue.
Note: Working capital turnover is an important indicator that helps businesses evaluate the efficiency of working capital use. However, to have a comprehensive view of the financial situation, businesses need to combine working capital turnover analysis with other financial indicators such as current ratio, debt to equity ratio, and profitability indicators.
2. How to calculate working capital turnover?
Working capital turnover is calculated by the formula:
Working capital turnover = Net sales / Average working capital
In there:
- Net revenue: Is the total revenue of the business after deducting revenue deductions such as sales discounts, returned goods, and related taxes.
- Average working capital: Calculated by taking the average of the working capital at the beginning and end of the period. Working capital is determined by the formula:
Working capital = Current assets – Current liabilities
3. What is the working capital turnover period and what does it mean?
Working capital turnover period (also known as Days Working Capital – DWC) is an important financial indicator, reflecting the number of days it takes a business to convert working capital into revenue. This indicator helps evaluate the efficiency of short-term capital use in the production and business process.
3.1 Formula for Calculating Working Capital Turnover Period
Days Working Capital = Average Working Capital ÷ Net Sales × 365
In there:
- Average working capital = (Beginning working capital + Ending working capital) / 2
- Net revenue = Revenue after deducting revenue deductions
3.2 Relationship and Meaning
- Inversely proportional to working capital turnover: The shorter the working capital turnover period, the higher the working capital turnover, showing that the business is using capital more effectively.
- Short turnover period: Shows how quickly a business converts working capital into revenue, improving liquidity and reinvestment capabilities.
- Long rotation period: May indicate poor operating performance, such as falling revenue or long collection periods, affecting cash flow and solvency.
3.3 Illustrative Examples
Suppose:
- Beginning working capital: 1,000 million VND
- End of period working capital: 1,200 million VND
- Net revenue: 5,000 million VND
Average working capital = (1,000 + 1,200) / 2 = 1,100 million VND
Working capital turnover period = (1,100 / 5,000) × 365 ≈ 80.6 days
This means that it takes a business approximately 81 days to convert working capital into sales.
3.4 Applications in Financial Management
- Performance Evaluation: Compare rolling periods over periods to identify trends and adjust business strategies.
- Compare with competitors: Compare with businesses in the same industry to determine competitive position.
- Cash flow management: Reducing the conversion period improves liquidity and reduces financial risk.
4. How to manage and optimize working capital turnover?
Working Capital Turnover is an important financial indicator that reflects the efficiency of using working capital to generate revenue. This indicator is calculated by the formula:
Working capital turnover = Net sales / Average working capital
A high turnover shows that the business is using capital efficiently, while a low turnover may indicate liquidity or financial management problems.
Why Is Working Capital Management Important?'
Working capital is the financial “blood vessel” of a business, directly determining the ability to pay, operate and develop in the long term. Effective working capital management helps businesses ensure short-term cash flow while creating a foundation for sustainable growth.
- Liquidity assurance: Helps businesses have enough cash to pay short-term debts and maintain continuous business operations.
- Business expansion support: Abundant working capital allows businesses to invest in growth opportunities, such as expanding production or expanding markets.
- Maintain stable operation: Effective working capital management helps businesses avoid cash shortages, reduce financial risks and maintain stable business operations.
Solutions to Optimize Working Capital Turnover
To improve financial efficiency and ensure liquidity, businesses need to apply many synchronous solutions to optimize working capital turnover. These measures not only help to use capital resources reasonably but also contribute to improving competitiveness and long-term growth potential.
- Reduce inventory: Maintaining reasonable inventory levels helps avoid capital congestion and storage costs. Businesses can apply the Just-in-Time (JIT) method or an automated inventory management system to accurately forecast demand, reduce excess inventory while still ensuring continuous production and supply activities.
- Speed up debt collection: Long-standing receivables will reduce a business's cash flow. Establishing a clear credit policy, classifying customers according to their risk level, and using automatic debt reminders will help shorten the collection cycle, reduce bad debt, and improve liquidity.
- Manage accounts payable: Businesses should make the most of the payment terms allowed by suppliers to maintain flexible cash flow. However, this needs to be carefully considered so as not to affect the reputation and long-term cooperative relationship with partners.
- Control spending: Building a detailed budget and closely monitoring expenses in real time will help businesses promptly detect waste, thereby adjusting to optimize capital efficiency. Support from financial management software helps monitor cash flow more transparently and accurately.
- Increase revenue: Working capital turnover can only be improved when revenue grows steadily. Businesses should promote marketing activities, expand sales channels, take care of customers and develop new products/services to increase revenue, thereby improving cash flow and optimizing working capital.
Technology Solutions to Support Working Capital Optimization
In the context of economic fluctuations and cash flow is always a vital factor, businesses, especially SMEs (small and medium enterprises), often have difficulty maintaining working capital stable. status late paying customer, high inventory, or difficult to access bank loans causing the working capital cycle to be interrupted, directly affecting production and business activities.
To overcome these bottlenecks, Financial Technology Solutions (Fintech) was born as a powerful tool to support businesses. Smart working capital management, optimize cash flow and reduce financial risks. Notable among them are Bizzi Financing – pioneering technology platform in the field Supply Chain Financing (SCF) in Vietnam.
Bizzi Financing – Comprehensive working capital optimization solution
Bizzi Financing helps businesses Quick financing from unpaid invoices, reduce short-term capital pressure and maintain continuous production and business operations. Unlike traditional loans that require collateral, Bizzi Financing operates based on real transaction data between business and customers/suppliers, providing Fast, transparent and secure approval process.
Key benefits of Bizzi Financing:
- Quick capital from unpaid invoices: Businesses can receive money immediately 24-48 hours from the time of sending the sales invoice or purchase contract. This is especially useful when customers often have long payment terms of 30-90 days, helping businesses shorten the cash conversion cycle.
- No collateral required: Unlike traditional bank loans, Bizzi Financing does not require businesses to mortgage fixed assets. Invoices and transaction history are the basis for evaluating and approving capital advances.
- Increase liquidity and capital turnover: When cash flow is replenished in a timely manner, businesses can Pay suppliers on time, import raw materials on schedule, at the same time take advantage of business opportunities without delays due to lack of funds.
- Transparent process, technology integration: Bizzi uses a cloud computing platform and connects directly to the enterprise's ERP/accounting system, helping to automate the entire process from invoice checking, data reconciliation, to disbursement. This minimizes manual errors and increases transparency.
How does Bizzi Financing help optimize working capital turnover?
Low working capital turnover often results from Long-Term Receivables or large inventoryBizzi Financing acts as a “financial lever” to help businesses solve two main problems:
- Improve Receivables: When customers are late in paying, Bizzi Financing allows businesses to Convert bills to cash instantlyThis helps businesses avoid interruptions in cash flow and reduces pressure on bank loans.
- Optimize Payables Management: Thanks to the flexible capital flow from Bizzi, businesses can Pay suppliers on time, from which to negotiate price offers and purchase conditions, reduce input costs.
- Shorten the cash conversion cycle (CCC): When a business collects money quickly from customers and pays suppliers on time, the cash conversion cycle is significantly shortened. This is the foundation for improve working capital turnover and improve overall operating performance.
Practical applications for SMEs
A small and medium-sized manufacturing enterprise often has to import raw materials in large quantities but customers pay on a 60-90 day term. This causes the enterprise to constantly be short-term capital shortage and depend on bank loans with high interest rates.
With Bizzi Financing, businesses can:
- Advance capital from sales invoices to import raw materials on schedule, without interruption of production.
- Maintain good relationships with suppliers thanks to Pay on time, even get discounts for early payment.
- Take advantage of flexible capital to expand business, invest in marketing or upgrade production lines.
Easy connection, quick deployment
Bizzi Financing integrates directly with accounting systems and ERP that the business is using. The registration and approval process is online, transparent, helping businesses save time, operating costs and quick access to capital.
Bizzi Financing is not only a financial solution, but also a strategic tool to help businesses manage working capital intelligently, improve capital turnover, and maintain sustainable development in the long term.
Explore now at: finance.bizzi.vn
Conclude
Clearly understand What is working capital turnover? helps businesses and accountants accurately assess the efficiency of short-term capital use, thereby optimizing cash flow and improving liquidity. Correctly applying the formula for calculating working capital turnover helps make accurate financial decisions, improve business performance and ensure sustainable development. Therefore, monitoring and analyzing this index should be an indispensable part of corporate financial management.
