What is working capital turnover? Calculation formula and meaning

In corporate finance, index helps. is the key to evaluating the effectiveness of short-term capital use. Understanding and optimizing this index not only helps maintain continuous operations but also enhances profitability. Let's coming Explore in detail the calculation, formula and optimization method of this important index in the article below.

1. What is working capital turnover?

Working capital turnover (working capital turnover) is an index that represents the number of times working capital is used and recycled to generate revenue in a certain period of time (usually a year). Working capital turnover represents the ability to use short-term capital to generate revenue, reflecting how a business uses short-term assets and short-term debt to support business operations. This index plays an important role in helping managers evaluate operational efficiency and come up with capital optimization strategies.

• Working capital turnover Measure the efficiency of using working capital of a business.
• A high index shows that the business uses working capital effectively to generate revenue.

• A low index can indicate that a business may have difficulty managing its working capital.
  

2. Correct formula and way to calculate working capital turnover

Calculation formula working capital turnover as follows:

Working capital turnover = Net revenue/ Average working capital

Ingredients in the formula:

• Net revenue: Is the total revenue of a business after deducting revenue deductions such as sales discounts, returned goods, and related taxes.
• Average working capital: Working capital is determined by short-term assets minus short-term liabilities calculated with the formula:

INaverage mobility = (Working capital at the beginning of the period + at the end of the period) / 2

Calculation steps

1. Determine net revenue: This is the total revenue after deducting sales deductions such as discounts, returns, etc.
2. Calculating average working capital: Average working capital is calculated by adding the working capital at the beginning of the period and at the end of the period and dividing it in half.
3. Apply the formula: Divide net revenue by average working capital to get the working capital turnover result.

Calculation example:

Suppose, in the last fiscal year, ABC company's net revenue was 800 billion VND. Working capital at the beginning of the period was 100 billion VND and working capital at the end of the period was 120 billion VND. To calculate working capital turnover, we will perform the following steps:

1. Determine net revenue: ABC company's net revenue for the year was 800 billion VND.

2. Calculate average working capital:

Average working capital = (100 + 120)/2 = 110 billion VND

3. Calculate working capital turnover:

Working capital turnover = 800/110 = 110 billion VND ≈ 7.27

So, working capital turnover index of company ABC is about 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.

3. Meaning of working capital turnover

Working capital turnover brings a lot of important information about the efficiency of short-term capital use of businesses. One working capital turnover index A high score proves that the business manages working capital well, quickly converting short-term assets into revenue, helping to improve financial ability and competitiveness in the market. However, a ratio that is too high may imply low levels of working capital, leading to difficulty meeting short-term financial obligations.

Cworking capital turnover ratio Low levels can be a sign of problems in working capital management, such as slow collection of receivables or excessive inventory, leading to reduced business efficiency and liquidity. If this index is negative, the business may be facing a situation where short-term debt exceeds short-term assets, causing serious financial pressure. So maintain one working capital turnover index at a reasonable level is very important to ensure effective business operations, maintain financial stability and create a foundation for sustainable business growth.

4. How to optimize capital turnover index

Optimization working capital turnover index Helps businesses improve operational efficiency and improve financial health. Here are some effective methods:

• Effective inventory management: Maintaining reasonable inventory levels helps reduce inventory costs and optimize working capital usage. Apply methods such as Just-In-Time (JIT) to ensure there is no excess inventory but still meet production and business needs​ (SlimCRM Resources)​​.
• Increase the speed of collection of receivables: Set up a reasonable credit policy and closely monitor receivables. Using a payment reminder system and providing incentives for customers to pay early can help businesses improve cash flow and increase working capital turnover.
• Manage accounts payable: Negotiate with suppliers to extend payment terms without affecting business relationships. This helps businesses have more time to use working capital for other profitable activities.
• Increase revenue: Promote marketing and sales activities to increase revenue, thereby improving working capital turnover index. This strategy helps increase capital turnover without significantly increasing the amount of working capital​ ​.
• Improve internal processes: Optimizing business and production processes helps reduce time and costs. Apply quality management methods such as Lean or Six Sigma to improve business performance and efficiency​.

• Use modern accounting software: Finally, using modern accounting software is an important step in optimizing working capital turnover. Using Viindoo Accounting helps businesses automate accounting processes, effectively manage finances and closely monitor receivables and payables.
  

Viindoo Accounting provides powerful features and tools to help you optimize working capital turnover effective, including:

• Smart inventory management systems help you accurately track the status of goods, optimize inventory levels and minimize the risk of obsolescence.
• An effective debt management system helps you track receivables, send automatic payment reminders and handle bad debts.
• A detailed financial reporting system helps you monitor business performance, identify weaknesses and make wise management decisions.
• The professional support team is always ready to answer questions and help you use the software most effectively.

Contact Viindoo Accounting immediately for free consultation and software experience!