Working capital = Inventory + Accounts receivables - accounts payables
these figures can be taken from the balance sheet of the company.
Working capital as a percentage of sales can be calculated by :
Working capital as a % of sales = (Working capital / Gross sales revenue) * 100
Gross sales revenue can be taken from Profit and Loss statement.
For example :
Working capital = $140,000
Gross sales revenue = $950,000
Working capital as a % of sales = (140,000/950,000)*100 = 14.74%
This means that, it takes 14.74 cents out of every dollar worth of sales for funding the working capital cycle. The amount of working capital that would be enough dpends on sales reveenue, whether the business focusses on selling products or inventory or it it experiencing growth or undergoing expansion.
Hence it indicates the organisation’s ability to finance additional sales without incurring additional debt.
As expansion needs capital in hand, this ratio is considered an important indicator to measure an organisaiton’s ability to expand it’s opeations without taking additional debt.
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