Many contractors' success is determined by their ability to analyze working capital turnover. In this article, after a brief review of the definition and working capital formula, we'll talk about working capital turnover and how to calculate it to improve your construction's efficiency.
What Is Working Capital and How To Calculate It?
Working capital also referred to as net working capital (NWC), is considered the lifeblood of a construction company. It represents the cash inflows and outflows within the project operation.
Working capital determines a company's operational efficiency, cash flow, and short-term financial health to aid the contractors to manage and make informed financial decisions.
You've probably considered your working capital when it comes to your monthly payments and expenses.
The table below demonstrates how to calculate working capital:
To calculate working capital, subtract current assets from current liabilities.
Working capital is important because it is used to fund operations and pay short-term debts. With enough working capital, contractors can pay their employees and suppliers as well as meet other obligations.
What is working capital turnover?
While working capital is defined as your current assets minus current liabilities. Working capital turnovers prove how effectively you use each working capital dollar to boost your company's bottom line.
Higher working capital turnover ratios say that a company can generate more sales. In contrast, a low ratio might state that more inventory has been bought than they needed in relation to their sales, which might lead to liabilities and excess stock.
Try to compare your working capital turnover to your rivals and observe how the ratio changes to determine how successful you are at using it. Remember that if your working capital turnover ratio is negative, there is pointless to have a comparison.
Working capital turnover formula
The formula for calculating the working capital turnover is:
The more the resulting number is, the more likely the company is to turn cash into revenue. For example: In 2021, Company A had Net Annual Sales: of 8 billion dollars and Working Capital was 12 billion dollars. Therefore, their WCT will be 8/12= 0.66
In the same year, company B had a WCT of 1.05
We can conclude that Company A did not use its working capital effectively like Company B
Please feel free to contact us at constructioncostacc.inc@gmail.com if you have any additional questions about the working capital turnover. Our team who specializes in offering tax and accounting services to the construction industry is ready to respond.
