Sales to Working Capital
Sale to working capital is the amount of cash generated from working capital investment. It measures how efficiently the company uses working capital to generate a sale.
Working capital or (net working capital) is the difference between the company’s current asset and current liability. Current Assets include Cash, Accounts Receivable, Inventory, etc, and current liabilities include accounts payable and accrued liability.
Sales to working capital ratio represent the company’s financial health and future growth. High sales to working capital show the high efficiency of the company using working capital for general sales. On the other hand, low sales to working capital mean that the company is undercapitalized. Low sale to working capital means the sale make is not balance with the working capital investment.
It shows the number of capital requirements for a given target sale. The ratio excludes current liabilities from the current asset as they are the present obligation that the company must fulfill in order to continue the operation.
Sale to Working Capital Formula
| Sale to Working Capital = Net Sale / (Current Assets – Current Liabilities) |
- Net Sale = Sales – Sales return
Sale to Working Capital Example
Based on company A’s financial statement, we have the following information:
| Description | Amount |
|---|---|
| Gross Sale | 500,000 |
| Sale Return | 20,000 |
| Cash | 100,000 |
| Inventory | 400,000 |
| Accounts Receivable | 100,000 |
| Accounts Payable | 200,000 |
Please calculate sales to working capital.
Sale to working Capital Ratio = (Gross Sale – Sale Return)/(Cash + Inventory + AR – AP)
= (500,000 – 20,000) / (100,000 + 400,000 + 100,000 – 200,000)
= 1.2 time
It means that company A can generate sale of $ 1.2 from $ 1 investment in working capital.
Conclusion
Hight ratio means that company can generate more sales from working capital and they are used multiple times per year. The more time working capital is used, the more sales are generated. However, it also means that the company’s working capital is too low to support the business. It may lead to bankruptcy due to a lack of working capital.