What is the capital turn?

Sometimes it is referred to as the turnover of equity or the turnover of working capital, the capital turnover is divided by the total amount of sales by the average net capital achieved from the production efforts. In principle, this allows you to compare the use of working capital with a number of sales that are generated for a given time. From this point of view, capital turnover can be considered as an assessment of how the company uses its resources to generate profits.

The best way to understand how capital is identified is to start by determining working capital. If the company has total assets of $ 5 million in the United States (USD) and currently has $ 3 million in obligations, working capital will reach $ 2 million. Assuming that the company generated $ 10 million for sale for the same period cited, a capital turnover would reach $ 5 million, because the total sales for the period were divided by a working capital at hand.

Companies want to achieve the highest possible amount of capital turnover. This serves as an indicator that the relationship between total sale and resources needed to produce goods and services to support these sales is healthy and that the company is in a healthy financial situation. Conversely, if the amount of working capital exceeds the amount of sale, it is a hint that the company must restructure its operating processes if there is a chance of survival in the long term.

Many businesses make it a place for regular calculation of capital turnover. It is not unusual that this type of evaluation will be carried out monthly as soon as the funds are closed for this period and it is possible to identify current assets, current obligations and the total amount of sales generated in the last completed Mon.th. This can help business owners identify the start of the downward trend and take steps to identify origin before the company is noticeably weakened.

It is important to realize thatThe only case of poor capital turnover does not necessarily mean that business is in need. A slow season that precedes the normally busy season can create a situation where production increases, while sales are falling because the company is preparing to satisfy demand in the coming months. By knowing how the sales year usually varies for business, it is possible to identify months in advance, where there is an increased chance of lower capital turnover, and when this lower turn will be compensated by months with higher turnover.