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Working capital turnover is a formula that is used to assess how well a business is utilizing the working capital that is currently available to the business. Measurements of this type can help a company avoid wasteful spending while also increasing the potential of the business to divert resources into projects that show promise of strengthening the company in some manner. An assessment of this nature occurs on a regular basis, allowing the company to make adjustments in its spending and funding habits when and as necessary.
To understand how a working capital turnover functions, it is necessary to define what is meant by working capital. This is simply the current assets of the business minus the current liabilities that the company is carrying. Assuming that the assets are more than the liabilities, the difference between the two figures serve as the resources for operating the business, including paying for the purchase of supplies and materials to keep the business going.
The focus of this type of turnover is to determine how efficiently the business is using the capital to launch and fund projects that are anticipated to lead to the generation of additional sales revenue. Calculating the turnover helps to provide some idea of whether a given project or process is in fact generating enough revenue to justify continuing that process or project. A high working capital turnover means that the activities are generating revenue that is above and beyond the expenditures incurred, while a flat turnover means that, while all expenses are covered, there is little or nothing left in the way of additional revenue. With a negative working capital turnover, the activities are not generating enough revenue to cover expenses, and should either be reworked in hopes of correcting the problem or abandoned altogether.
A fundamental analysis of this type is necessary is a business is to become self-sustaining and post any type of profit. By assessing the current status of the working capital turnover as it relates to the most recently completed financial period, it is possible to determine if the current procedures for working capital management are effective and producing the desired results, or if action should be taken before the stability of the company is placed in jeopardy. At times, the outcome of calculating this rate of turnover is also helpful in terms of comparing the operation of the business with the way that competitors operate, possibly leading to some refinements that increase the profitability of the business in the upcoming financial periods.
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