What is Working Capital Turnover Ratio, and How is it Calculated?

The working capital turnover ratio shows how capable your business is at utilizing its working capital. In different terms, it shows the link between the finances utilized to support the business’s operations and the profits it generates accordingly. To calculate the working capital turnover ratio, you need to divide the net annual sales of the enterprise by its average working capital. Calculating the working capital turnover ratio provides a right sign of how hard you put your available capital for the business to gain success.

What Is a Working Capital Loan?

A working capital loan is generally taken for financing the regular business operations. Not every business or enterprise witnesses frequent sales or profit. At times, the need for finances to keep the business operation running might take place.

This generally happens with businesses with seasonal business cycles, whereas some might need this kind of loan during festivals. These loans can be collateral-free or secured. It means you might or might not be required to provide collateral to acquire this loan. The working capital of any business is also a sign of its financial condition and liquidity state.

This loan is not intended to finance your business progression or asset acquisition plans. It is used to comply with your temporary monetary obligations and operational necessities. This type of business loan in Mumbai is mainly applicable to SMEs (small and medium enterprises). It typically comes with a loan term that ranges from 6 months to 4 years. This loan term differs from bank to bank.

What Does Working Capital Turnover Ratio Indicate?

A high working capital turnover ratio shows management is very effective in using temporary assets and liabilities to support sales.

On the other hand, a low ratio shows your company might be investing in too many accounts receivable and inventory to maintain its sales. This could result in too many bad debts or out-of-date stock. The ideal way to use the working capital turnover ratio is to track how it has been varying over the years and compare it to other businesses in a similar domain. With this practice, you can learn how to compare against your competitors. This will also help you in encouraging you to intend more practical uses for your working capital.

What Are The Benefits And Drawbacks Of A High Working Capital Turnover?

Benefits

Indicates your business is running without any hassle.
Might offer your business a competitive edge over the competitors.
This shows that there is not much requirement for extra funding.

Drawbacks

The business could be bankrupt in the forthcoming years.
It shows that your business doesn’t have adequate capital to back its sales growth.

Key Features of a Working Capital Loan

The loan amount granted through a working capital loan relies on the business experience, business age, and necessities. The amount differs and is personalized to comply with the specific monetary requirements of the business.
Age is another eligibility requirement that needs to be met to apply for this loan. The age of the borrower must be more than 21 years and less than 65 years.
While applying for this loan, banks ask for a processing fee. The processing fee amount varies from bank to bank.
The interest rate on a working capital loan is curated according to the borrower’s requirements.
Only self-employed professionals, sole proprietors, MSME, private or public companies, and entrepreneurs are eligible for a working capital loan.

FAQs

What Are The Main Objectives Of the Stand Up India Scheme?

SC/ST and women entrepreneurs can get numerous benefits from the Standup India Scheme. The main objective of this government initiative is to empower women and minorities. Under this scheme, a bank loan of up to 1 Crore INR can be obtained by the SC/STs or women entrepreneurs. However, loans are obtainable only for the Greenfield project under the Standup India Scheme.