Accounts & Finance
The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets. Receivables turnover ratio can be calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period.
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. In other words, it measures how many times a company sold its total average inventory dollar amount during the year.
Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers, or cost of sales, and dividing it by the average accounts payable amount during the same period.
The cash to cash cycle is the time period between when a business pays cash to its suppliers for inventory and receives cash from its customers. The concept is used to determine the amount of cash needed to fund ongoing operations and is a key factor in estimating financing requirements.
The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
This is a meticulous strategy of financing the working capital with moderate risk and profitability. In this strategy, each of the assets would be financed by a debt instrument of almost the same maturity. It means if the asset is maturing after 30 days, the payment of the debt which has financed it will also have its due date of payment after almost 30 days.
It is a conservative strategy of financing the working capital with low risk and low profitability. In this strategy, apart from the fixed assets and permanent current assets, a part of temporary working capital is also financed by long-term financing sources.
This strategy is the most aggressive strategy out of all the three. The complete focus of the strategy is in profitability. It is a high-risk high profitability strategy. In this strategy, the dearer funds i.e. long-term funds are utilized only to finance fixed assets and a part of the permanent working capital. Complete temporary working capital and a part of permanent working capital also are financed by the short-term funds.