When a company faces a lower ratio, it might experience insufficient funds for the smooth running of day-to-day operations and short-term loans. Here are a few advantages and disadvantages of this ratio: Advantages of net sales to working capital ratioįor a company, the net sales to working capital ratio offers the following advantages: Ensures liquidity Related: Revenue Vs Turnover: Meaning, Key Differences And Examples Advantages And Disadvantages Of Net Sales To Working Capital Ratio

It helps a company efficiently use their working capital. This helps analysts understand how a company performs compared to its competitors.

An ideal way to use net sales to working capital is to track and understand how the ratio changes with time and compare it to other companies in the industry. This might cause a large amount of excessive debt or obsolete inventory. Lower ratioĪ lower ratio shows that a company might invest in accounts receivable and inventory to support sales. Unless the company raises additional funds, the chances of a company going bankrupt are high. An exceptionally high ratio shows that a company does not have sufficient capital to support its sales growth. Companies prefer a higher ratio because it provides a competitive advantage over similar businesses. A higher ratio shows that a company requires little funding to run business operations smoothly. The company can generate a higher rupee value for sales of every rupee of working capital used. Here is why a net sales to working capital ratio is significant: Higher ratioĪ higher ratio shows that management optimally uses current assets and liabilities to generate sales. Related: What Is Turnover And Why Is It Important In Business? Significance Of Net Sales To Working Capital Ratio Net annual sales = Total annual sales – Sales return – Discounts Working capital = Current asset – Current liabilitiesĪverage working capital = (Working capital at the beginning of the period + Working capital at the end of the period)/2 Here are other formulas you may use to calculate the ratio: Working capital turnover = Net annual sales / Average working capital The formula for calculating net sales to working capital ratio is: Typically, a company calculates the ratio based on a calendar year. This means that the overall working capital decreases, affecting the ratio calculations. For instance, when a company pays off a loan of ₹50,000, this decreases the company's current liabilities by ₹50,000. Related: What Is Working Capital Management? (Importance And Ratios) Formula For Calculation Of The Working Capital Turnover RatioĬertain factors affect a company's net sales to working capital ratio, such as current liabilities and current assets changes. The ratio determines how efficiently the company can pay off its debts in a set period and avoid running out of cash due to increased production. It helps investors determine the company's financial performance and overall operations.

A lower ratio shows that the company cannot run its operations efficiently. If the working capital rises too high, it suggests the company requires raising additional capital to support growth. A higher ratio shows that a company generates higher sales. This ratio helps investors measure how effective a business is at generating sales for every rupee of working capital. The ratio shows the relationship between the funds used to finance operations and the revenue generated from those funds. Working capital is the difference between a company's current assets, such as accounts receivable, cash, accounts, inventories and finished goods and the current liabilities, such as debt and accounts payable. The working capital turnover ratio is an efficiency or activity ratio that determines how efficiently a business utilises its working capital to generate revenue or sales. View more jobs on Indeed View More What Is The Working Capital Turnover Ratio?

Formula for working capital turnover