What to Do
Working capital productivity is measured by examining the relationship between sales, or turnover, and the spending of available funds. It is calculated by dividing sales by working capital (current assets minus current liabilities)—typically every quarter. The formula is:
Example:
If sales for the quarter are $10,000, current assets are $1,500, and current liabilities are $900, then:
With this version of the formula, the higher the result the better. Another version (“working capital turnover” or “working capital to sales ratio”) offers a different way of looking at the same thing, by reversing the figures:
So using our example, the calculation looks like this:
With this version, the lower the percentage the better.
What You Need to Know
- The combined results of several quarters will make the calculation more accurate, and perhaps indicate a trend.
- An average figure for a longer period may give the most meaningful picture.
- The calculation can also be used to compare a company’s productivity with that of its competitors.
- Monitoring working capital productivity is often a catalyst for improving efficiency—for example, speeding up the design phase, cutting out unnecessary procedures and tightening up invoicing. Capital is then released to use in more constructive ways.
Where to Learn More
Web Site:
The Motley Fool: www.fool.com
