What is working capital turnover ratio?

2 min read

Working capital turnover ratio is the ratio between the net revenue or turnover of a business and its working capital. For instance, if a business's annual turnover is Rs. 20 lakh and average working capital Rs. 4 lakh, the turnover ratio is 5, i.e. (20,00,000/ 4,00,000). The ratio indicates how effectively a company uses available funds for the streamlined production of goods or services.

A positive capital turnover ratio means that a business is using its working capital justifiably. On the other hand, a low capital turnover ratio means that the company is investing more in inventory. It may also mean that the organisation has too many outstanding liabilities with its suppliers, which increases the risk of bad debts.

The accumulation of such debts can hamper business operations considerably, but a Working Capital Loan from Bajaj Finserv can help. With this offering, you can get up to Rs. 75 lakh to maintain an optimal working capital turnover ratio and ensure healthy business operations. You can also opt for a Flexi loan, which is the perfect solution for dynamic capital needs.

The feature allows you to borrow as and when you need funds from an approved sanction and pay interest only on the amount withdrawn. You can also prepay as and when your business has excess cash, at no extra cost, and opt to pay interest-only EMIs at the start of the tenor to reduce the monthly outgo.

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Frequently Asked Questions

What is the definition and an example of working capital turnover ratio?

The working capital turnover ratio is a financial ratio that helps companies understand their efficiency in using their working capital to generate sales. It is calculated by dividing net sales by average working capital. Here is an example of this works:

A company that has net sales of Rs. 10,00,000 and an average working capital of Rs. 2,00,000 would have a working capital turnover ratio of 5 (10,00,000 divided by 2,00,000).

What is a normal capital turnover ratio?

There is no such thing as a defined normal working capital ratio, as this number varies by industry. Generally, a higher working capital ratio is better for your company’s finances.