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I try my best to explain it in brief. Therefore, The ingredients of the working capital are:
Current Assets: Inventories, securities, Cash and bank balances, loan and advances, and debtors’
Current Liabilities: Creditors’, Provisions, short term loans.
The working capital cycle also knows as Operating cycle. It consist of the following
1 raw material conversion period
2 WIP (work in progress) conversion period
3 FG (Finished Goods) conversion period
4 Debtor’s conversion period: higher debtors’ turnover ratio implies that better cash flow and prompt collection of payment from customers.
5 Creditor’s conversion period: Reverse of4.
The working capital requirements as higher as operating cycle period.
Further we use working capital turnover ratio to determine the efficiency of the concern. The formula is “cost of goods sold or sales/net working capital. If this ratio is higher, it means the company uses its working capital effectively and efficiently. besides this we also focus on stock turnover.
Can We get Ratio for that
First
By monitoring all elements of the current assets, especially inventory if applicable
Secondly
Try to increase the scale of current assets.
Thirdly
Scaling ob liabilities in the narrowest possible range
