The business activity of the enterprise is evaluated using a special type of indicators - indicators of turnover. They characterize how intensively and effectively this or that resource is used. These indicators can be calculated in two forms and characterize either the number of revolutions per period, or the duration of one such revolution. Even based on only one name, it can be judged that the analysis of the working capital turnover of an enterprise is extremely important for studying the financial condition of an organization.
Working capital in the General case can be considered as objects of labor, which is directed to a certain activity of the company. They are completely consumed in the production process, so the faster they turn around, the better. Of course, the foregoing is more relevant to stocks, but the acceleration of turnover and other elements of current assets will be an exclusively positive phenomenon. Consider in more detail some indicators of working capital turnover.
Naturally, the first thing to do is to assess the turnover of the total value of this property. To calculate the coefficient, it is enough to divide the amount received for a certain period of revenue by the average cost of working capital for the same period. The use of the average value in the calculations is obviously due to the fact that it is necessary to take into account possible changes in the value of the property that occurred during the period. This indicator characterizes how much revenue each unit of value of current assets could bring . The period during which one revolution passes is determined by dividing the duration of the study period by the number of revolutions. Typically, the period is a year or a quarter, so the numerator will be either 360 or 90 days.
Indicators of working capital turnover should also be calculated in the context of individual groups of property, which can be found in the balance sheet. It is very important to determine the turnover of debt, which the company can collect - accounts receivable. It is calculated using exactly the same methodology, in which case it would also be advisable to calculate the duration of the turnover. In addition, it is especially important to assess the turnover of “receivables” in terms of customer debt. The duration of the turnover of this debt reflects the average period for which the company lends to its customers.
The turnover ratio of the formed stocks is also included in the current assets turnover indicators. Its definition is made in a slightly different way, since the numerator of the formula does not include revenue, but the sum of the cost of production. This choice is due to the nature of stocks. As for determining the duration of one revolution, there are no differences.
The last important indicator that we will consider will be cash turnover. It is also determined on the basis of revenue and characterizes its value per unit of free money of the organization. The duration of the turnover in this case will show how long the average funds are not present in the turnover and do not participate in the formation of revenue.
Indicators of working capital turnover should be constantly studied and analyzed. With regard to the coefficients, it should be ensured that the number of revolutions should increase, therefore, appropriate management decisions should be made. Thus, the period of one revolution should be reduced. This may be due to either an increase in revenue or a decrease in the average value of a property. It should also be remembered that performance indicators of working capital are not limited to indicators of their turnover. It is imperative to determine and analyze the profitability ratios of this property.