Title: Working Capital Turnover Definition
Headings: Working Capital Turnover
Working Capital Turnover
What Is Working Capital Turnover?
Key Takeaways
Working Capital Turnover
The Formula for Working Capital Turnover Is
What Does Working Capital Turnover Tell You?
Working Capital Management
Special Considerations
Example of Working Capital Turnover

Content: A high turnover ratio shows that management is being very efficient in using a company’s short-term assets and liabilities for supporting sales. In other words, it is generating a higher dollar amount of sales for every dollar of working capital used. In contrast, a low ratio may indicate that a business is investing in too many accounts receivable and inventory to support its sales, which could lead to an excessive amount of bad debts or obsolete inventory . To gauge just how efficient a company is at using its working capital, analysts also compare working capital ratios to those of other companies in the same industry and look at how the ratio has been changing over time. However, such comparisons are meaningless when working capital turns negative because the working capital turnover ratio then also turns negative. Working Capital Management
Working capital management commonly involves monitoring cash flow, current assets, and current liabilities through ratio analysis of the key elements of operating expenses, including working capital turnover, the collection ratio, and inventory turnover ratio. Working capital management helps maintain the smooth operation of the net operating cycle, also known as the cash conversion cycle (CCC)—the minimum amount of time required to convert net current assets and liabilities into cash. When a company does not have enough working capital to cover its obligations, financial insolvency can result and lead to legal troubles, liquidation of assets, and potential bankruptcy. To manage how efficiently they use their working capital, companies use inventory management and keep close tabs on accounts receivables and accounts payable. Inventory turnover shows how many times a company has sold and replaced inventory during a period, and the receivable turnover ratio shows how effectively it extends credit and collects debts on that credit.