What is working capital efficiency?

working capital effectiveness is a measure of how well the company balances the money owed by customers from the sale and money invested in the inventive goods against the money they owe for obtaining an inventory. This relationship of paying for goods, for goods and waiting for payment for goods is called a cycle of cash conversion. The more efficient the company navigates the cash conversion cycle, the higher its level of working capital efficiency.

Almost all businesses must have cash at hand to finance short -term liquidity needs. This cash is known as working capital. The amount of the working capital that the company has in connection with the need will affect the credibility of the company in the eyes of the creditors, and if it is a public society, the opinions of investors on the financial health of the company. If the efficiency of the company's working capital is high, if its business practices minimize the need for borrowed funds for short -term operational needs, it canMake Easier for a company where to borrow, if necessary.

Businesses with large investments in permanent assets or companies that primarily provide services have less working capital needs than others. The efficiency of working capital becomes very important for businesses, such as retailers who have to obtain goods supplies, owned sellers for this inventory, and then owned by customers who buy the goods. This is mainly a problem for seasonal retailers who have to invest significantly in inventory well in advance of their strongest selling season, yet customers may not be paid for several months.

Determination of the efficiency of the company's working capital begins with the measurement of its cycle of cash conversion. This is the issue of adding an average number of days between the product to inventory and its sale to the average number of days after the product is sold until the payment is out ofand sale of universities. From this, the company deducts the average number of days between obtaining a product for paying for it. This number is a cycle of transformation of the company's cash.

usually the higher the cash conversion cycle, the higher the average number of days to convert in stocks less than the average number of days to pay for revenue costs, the lower business capital evaluation. This represents business costs, because working capital is either a capital in the company that cannot be provided by other uses if the company is ineffective or it is a debt, which is more expensive, the longer it owes. Almost every business is to encourage managers in every step of the sales process to work with the aim of efficient use of capital. The less time the goods are in the inventory, faster sales payments are collected - the longer payments to the sellers can be delayed, the better.