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Key Ratios – Working Capital
The following, easily calculated, ratios are important measures of working capital utilization.
Stock Turnover
(in days) Average Stock * 365/Cost of Goods Sold= x days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.
Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.
Receivables Ratio
(in days) Debtors * 365/Sales = x days It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why ?
One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.
Payables Ratio
(in days) Creditors * 365/Cost of Sales (or Purchases) = x days On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.
Current Ratio Total Current Assets/Total Current Liabilities = x times
Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities a ...