How many days does it take working capital to turn back into cash? Calculating the turnover ratio and the turnover period

Sardor, owner of the "Sarv Mebel" workshop, was puzzled at the end of the year: sales have grown, there is a profit, yet the account is always short of cash. Finance officer Nodira asked him one question: after how many days does one soum the workshop spends on timber come back from the buyer as money?

Turnover indicators answer this question. They are not complicated: two division operations are enough.

How are the turnover ratio and the turnover period calculated?

The turnover ratio shows how many times working capital has gone round the "money, goods, money again" circle in a period (for example, in a year):

The turnover period shows how many days one full circle lasts:

The average balance is usually taken as half the sum of the balances at the beginning and end of the period. In a seasonal business, taking the average of the month-end balances gives a more accurate result, because the beginning and end of the year may fall on the same "quiet" month. To keep the calculation simple, the year is taken as 360 days in the example.

Annual figures of "Sarv Mebel" (million soum):

Annual net sales revenue is 1 800 million soum, cost of goods sold is 1 260 million soum.

Total turnover: 1 800 ÷ 450 = 4 times, i.e. 360 ÷ 4 = 90 days. Money paid for timber comes back on average after three months.

How can you find where the money is "stuck"?

The overall 90 days is a single number, it does not show the cause. So we calculate working capital by its parts. Inventories and payables are compared with cost, while receivables are compared with revenue: inventory sits in the warehouse at cost, while the buyer owes at the sales price.

Now the picture is clear:

• Operating cycle = inventory days + receivable days = 60 + 30 = 90 days. That is how long it takes from the day the timber arrives until the buyer pays.
• Cash cycle = operating cycle − payable days = 90 − 30 = 60 days. The supplier waits 30 days, and the workshop "carries" the remaining 60 days with its own money or a loan.

Looking at the table, Nodira immediately drew a conclusion: the biggest "hole" is in the warehouse. Finished wardrobes and timber stock sit for two months, while collecting from buyers takes one month.

If the operating cycle shortens, how much cash is released?

There is one trap here: inventory sits at cost, while receivables sit at the sales price, so "one day" equals a different amount for the two parts.

• One day of inventory: 1 260 ÷ 360 = 3.5 million soum (at cost).
• One day of receivables: 1 800 ÷ 360 = 5 million soum (at revenue).

Sardor took two measures: he began ordering timber every month in the required volume, and the inventory period fell from 60 days to 48 days; he introduced staged payments for large customers, and receivables shortened from 30 days to 27 days. The operating cycle fell from 90 days to 75 days.

As you can see, calculating the 15-day reduction as "15 × 5 = 75 million" would be wrong: inventory days are cheaper, they "sit" at cost. The correct result is 57 million soum. Working capital falls from 450 to 393 million soum, and the overall turnover period becomes 360 × 393 ÷ 1 800 ≈ 79 days.

With revenue unchanged, the workshop can use 57 million soum without taking an additional loan. If this money was previously covered by a loan, the interest expense also falls.

Three practical tips: 1. Do not judge the indicator by one year's figure. Compare it with your own workshop's previous years: is the period getting longer or shorter? 2. Artificially stretching payable days shortens the cash cycle, but may damage the relationship with the supplier. Start with inventories and receivables first. 3. If revenue grows and the turnover period also lengthens, this is a warning sign: sales may be going into debt or into the warehouse.