Working Capital Turnover Ratio – Meaning & Definition

Business Finance

When you run a business, you need money for daily expenses. This is your working capital, i.e., the money you need to run the day-to-day functions. Without working capital, you cannot run your business smoothly. Obviously, you cannot wait for money from creditors to meet your working capital needs. Therefore, to tide over the shortage of money, many owners opt for a working capital loan from banks or NBFCs.

This loan can help you pay for crucial expenses required to keep your venture going. You may or may not need to offer security to get a working capital loan, based on your profile and the amount needed. But how can you decide the amount of money you need as a working capital loan? The best way is to know your working capital turnover ratio (WCTR).

Read on to learn more about WCTR and how it can be a basis for deciding whether to get a working capital loan.

Working Capital Turnover Ratio Definition

WCTR is a vital ratio for every company. This ratio will help you know how well your business uses its working capital to drive growth and boost sales. This ratio will also help you learn about the relationship between the funds you use to pay for your company’s operations and the money your company earns to make a profit and keep the venture running.

The key aspects of WCTR are:

  • You can measure how well your enterprise can create sales for every rupee of working capital you invest.
  • If your WCTR is high, then it means that your business has made huge sales.
  • If your WCTR is too high, it can mean that you need to raise more capital to drive future growth.

How to calculate the working capital turnover ratio

You can use a very simple formula to know what your WCTR is. But first, you must understand two inputs:

  • Average Working Capital: Average working capital is your current assets minus your current liabilities.
  • Net annual sales: Net annual sales are the gross sales of your company minus allowances, discounts, and returns.

Now, to find out your WCTR, you need to divide your net annual sales by your average working capital.

Working Capital Turnover Ratio= Net Sales / (Total Assets – Total Liabilities)

Definition of working capital turnover ratio

Once you know your WCTR, it can help you learn many aspects of your venture. Some of the main things you must know are:

  • If your WCTR is high, you are a good manager. You can use your assets and liabilities to grow sales. This means every rupee of working capital is helping you get a higher sales value.
  • If your WCTR is low, you are selling many goods on credit. It also means that you are buying too much raw material with cash. This can lead to a lot of bad debt or too much inventory.
  • To know the ideal ratio for your sector, comparing WCTR from many entities in the same line of work is better. You can also track how their WCTR is changing over time.
  • But if your working capital is negative, your WCTR will also be in the red zone.

Need for a Working Capital Loan

working capital loan is a business loan that banks and NBFCs offer to business owners. The main reason to opt for this loan is when your cash flow and reserves cannot take care of the daily needs of your venture. If you can create enough sales and cash flow to support the growth of your venture, then you may not need a working capital loan.

However, if the current liabilities of your business are greater than your existing assets, you will need a working capital loan.

Here are some key aspects of this loan:

  • This loan can help you take care of your pressing needs and ensure that there is enough money to keep it running.
  • This business loan is meant for the short-term financial needs of your venture and is not ideal for long-term planning.
  • You can better focus on your long-term goals and pursue them when your short-term needs are taken care of.
  • If you have a seasonal business, this loan can keep the work going during lean times.

Features of a Working Capital Loan

Here are some of the key features of a working capital loan that you must know before taking a decision:

  • Nature: Based on the lender’s rules, you may or may not need to offer security to get this loan. Most lenders need security if the loan amount is above a given limit.
  • Amount: If you do not want to give security, the maximum loan you can take will be around Rs. 10 lakhs. There is usually no upper limit if you are giving security, as the loan amount will depend on the value of the security.
  • Tenure: The loan tenure can range from 12 months to 60 months. This period can change as per the rules of the lenders.
  • Credit Score: Your CIBIL must be at least 680 to get a working capital loan. To get the best deals, your CIBIL should be 700+.
  • Process: Most lenders offer online or doorstep services for this loan. Hence, it is very easy for you to finish the process.

If you want to grow your business but are short on cash to take care of daily needs, then you can opt for a working capital loan. It is a great option to meet your short-term needs. If you want the best deal on a working capital loan, then Piramal Finance can be the option you have been waiting for. They offer great deals on all business loans and are always there to support you. You can also contact their experts for guidance.