That is another reason why a company will seek to minimise its inventory levels. Working capital turnover is defined as a ratio that measures how effectively a company utilizes its working capital to support its sales and revenue growth. ![]() ![]() Moreover, there are significant costs associated with holding inventory, including storage or handling, the costs of financing inventory, or the opportunity cost. Any surplus cash will usually be invested in other assets to increase profitability. As a result, a business will seek to invest a minimum amount of funds in working capital to ensure the company can meet the clients' demand for products or services and pay any short-term debts and liabilities. This analysis used data available from 13,328 companies listed on various stock exchanges globally. PwC UK Working Capital Report 2019/20 found that a number of global listed companies had excess working capital of €1.2tr on balance sheets. Identifying operational inefficiencies: A low working capital turnover ratio may indicate inefficiencies in the companys operations. OWC-to-Sales Operating Working Capital Sales Generally, companies should avoid the ratio from becoming too high, which is a subjective measure and entirely dependent on the industry. In such a case, the excess of funds cannot be invested in other assets or business opportunities to generate additional revenue. Calculating the OWC-to-sales ratio is relatively straightforward, as it compares a company’s OWC to sales. However, this unnecessarily high level of liquid assets may, in turn, affect profitability because the company has funds tied up in idle assets. A company with a substantial amount of cash and inventory will show a remarkable ability to pay its debts as and when they fall due for payment. In essence, the aim of working capital management is to balance the objectives of liquidity and profitability.
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