To calculate the length of working capital cycle there needs to be some
ratios that sould find out first these ratios are called working capital
ratios.
These ratios are the one that are involved in working capital cycle i:e inventory, WIP, finished goods, receivables, payables. These ratios also helps to appraise the performance of a company in a particular period or compare with previous years. Besides this there are some LIMITATIONS of the ratios as well i:e these are based on historic data do not take account of future, there may be element of inflation that will not be consider, there may be some manipulation in the ratios that distorted the actual results
The some specific ratios that are involved in working capital cycle i:e inventory, WIP, finished goods, receivables, payables are as follows.
To calculate average inventory held: Opening inventory + Closing inventory ÷ 2
Where material usage is not given purchases or cost of goods sold will be replace by this.
To calculate average WIP: Opening WIP + Closing WIP
Where Production cost is not given purchases or cost of goods sold will be replace by this.
Finished goods period: It the length of time when goods are completed and ready for sale. Calculated as:
Average finished goods in inventory ÷ Cost of goods sold × 365
Where cost of goods sold is not given purchases will be replace by this.
Receivable days: The spam of time during which the debtors or customers pay. Calculated as:
Average receivables ÷ Credit sales × 365
Payable days: The time in which customers are being paid. Calculated as:
Average payables ÷ Credit purchases × 365
Further there are two more ratios that assists in evaluating performance that are as follows:
Inventory turnover(in times): Cost ÷ Average inventory held
Working capital turnover: Sales revenue ÷ Net working capital
These ratios are the one that are involved in working capital cycle i:e inventory, WIP, finished goods, receivables, payables. These ratios also helps to appraise the performance of a company in a particular period or compare with previous years. Besides this there are some LIMITATIONS of the ratios as well i:e these are based on historic data do not take account of future, there may be element of inflation that will not be consider, there may be some manipulation in the ratios that distorted the actual results
The some specific ratios that are involved in working capital cycle i:e inventory, WIP, finished goods, receivables, payables are as follows.
Inventory holding days: It is the time b/w inventory purchased and
being used in production. Calculated as:
Average inventory held Material usage × 365To calculate average inventory held: Opening inventory + Closing inventory ÷ 2
Where material usage is not given purchases or cost of goods sold will be replace by this.
WIP holding days: It is the time in which goods remain in production.
Calculated as:
Average WIP ÷ Production cost × 365To calculate average WIP: Opening WIP + Closing WIP
Where Production cost is not given purchases or cost of goods sold will be replace by this.
Finished goods period: It the length of time when goods are completed and ready for sale. Calculated as:
Average finished goods in inventory ÷ Cost of goods sold × 365
Where cost of goods sold is not given purchases will be replace by this.
Receivable days: The spam of time during which the debtors or customers pay. Calculated as:
Average receivables ÷ Credit sales × 365
Payable days: The time in which customers are being paid. Calculated as:
Average payables ÷ Credit purchases × 365
Further there are two more ratios that assists in evaluating performance that are as follows:
Inventory turnover(in times): Cost ÷ Average inventory held
Working capital turnover: Sales revenue ÷ Net working capital
Description: To calculate the length of working capital
cycle there needs to be some ratios that sould find out first these ratios are
called working capital ratios.
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