Working Capital Turnover
See: Working Capital.
Working capital turnover is Sales divided by Working Capital.
What is “working capital,” you ask? It’s the money that companies have to burn (spend)...so basically, their assets minus their liabilities. When you take sales and divide it by working capital, you get a ratio. The bigger the ratio, the better you look to outsiders. The higher your working capital turnover, the more efficient you’re being with your money.
Think about it: the bigger the number is on top in a fraction, the bigger that fraction becomes. When sales is proportionally larger than working capital, it means there’s proportionally more money coming in through sales than is being spent by the business. If you’re burning through cash, that bottom number in the fraction (working capital) will swell like a beached whale, making the whole fraction smaller (and making that company look bad, also like a beached whale).
Analysts use working capital turnover to be judgemental overlords on companies, comparing them all to each other to see who’s the biggest beached whale of them all.
And hey, if you want to know more about working capital than anyone else you know, check out Shmoop's Accounting course. Go forth and balance.
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Finance: What is working capital?268 Views
finance a la shmoop. what is working capital? alright people say we're opening
a lemonade stand. I seed what you did there. unfortunately we can't just blink [man stands in front of stage]
our eyes like Aladdin's genie and you know make it all happen. magically we
don't need a ton of money to start things but we need some money in advance. [genie comes out of lamp]
of you know when we begin collecting revenues well we have to rent a location,
and pay six months rent in advance, and we got to buy about 87 pounds of
sugar and 4,000 lemons and hundred fourteen huge bottles of purified water,
oh and cups we need eight thousand cups. all told it costs about 50 grand in
capital, working capital. see we did there, we need before we can start to run the
business, and you know pay employees and so on .so we get an investor TBOG. the [people stand in line for lemonade]
bank of Grandma. yeah we love her. she gives us a hundred grand. well that
entire hundred grand invested into our little business is our total working
capital. right? fifty grand and start the business working and we got 50 left over
or just in case things don't start up as quick as we hope .its capital that lets
us start working. in cleverly named there. all right well 50 grand we know we're
gonna spend 50 grand and cover the time in between when we're up and running and [calendar]
revenues and all the other stuff start to kick in. and well yeah it's that
simple. put together an actual drinkable lemonade recipe ?well that's just a
little bit harder. working capital. live it love it breathe it. [ grandma grimaces]