Working Capital Formulas

Working Capital Formulas

Some important working capital formulas have been given formula. These formulas have been further explained with easy examples in my other articles. Working capital is current asset minus current liabilities. The following ratio is important working capital

1.   Current Ratio

2.   Quick Ratio

3.   Debtor Collection period

4.   Debtor Turnover Formula

5.   Creditor Payment period

 Current Ratio Formula

Current ratio is calculated to describe the liquidity position of the company. A health current ratio explains the company ability to make future payment. Current ratio is calculated by the following formula.

Current Ratio =   Current Asset      .                                Current Liabilities

Current Ratio Formula Example

Closing Stock = 50,000

Closing Debtor= 30,000

Cash              = 20,000

Closing Creditor= 20,000

Calculate Current Ration

Solution

Current asset

Closing Stock =  50,000

Closing Debtor= 30,000

Closing Cash =   20,000

                        100,000

Current Ratio =   Current Asset   

                         Current Liabilities

=100,000/20,000

=5:1 (current asset are 5 times to current liablities)

Quick Ratio Formula

Quick ratio is another important liquidity ratio. Quick ratio is further extension of current ratio. Quick ratio gives more clear idea about the liquidity position of the company.

Quick Ratio =   Current Asset -Stock   .                                Current Liabilities

Quick Ratio Formula Example

Stock in Hand = 50,000

Debtor           = 30,000

Cash               = 20,000

Creditor          = 30,000

Calculate Current Ratio of the company

Solution

Current asset

Stock = 50,000

Debtor= 30,000

Cash =  20,000

          100,000

Quick Ratio =   Current Asset-Stock   

                        Current Liabilities

=(100,000-50,000)/30,000

=50,000/30,000

=1.666:1 (Quick asset are 1.66 times than current liabilities)

 Debtor Collection Period Formula

Debtor collection period is calculated by dividing the Debtor by the credit sales. The calculation has been explained in my other article.

Debtor Collection Period Formula  =   Debtor or Average Debtor x365                                                                          Credit Sales

Debtor Collection Days Formula Example

Credit Sales =500,000

Account Receivable Balance        = 50,000

Calculate Debtor collection period

Solution

Debtor Collection Period =   Receivable or Average Receivable x365  

                                                  Credit Sales

= (50,000/500,000) x 365

=36.5 days Days

Debtor Turnover Formula

Debtor Turnover shows how many times sales made to the customer and payment received from them. Debtor turnover ratio is calculated by dividing credit sales by receivable. Debtor Turnover calculation has been explained in my other article.

Debtor Turnover Formula =   Credit Sales                                                       Receivables

Debtor Turnover Formula Example

Credit Sales                             = 250,000

Receivables or average Sales =      50,000

Calculate Debtor Turnover?

Solution

Debtor Turnover Formula =          Credit Sales    

                                                   Receivables

= 250,000/50,000

= 5

The above example shows that company has collected the payment from the customer 5 times.

 Creditor payment Period Formula

Creditor payment period simply explains creditor average time of payment. Companies prefer to recover the payment as soon as possible.

Creditor payment Period =   Average Creditor x365                                                    Cost of Sales

Creditor Payment Period Formula Example

Cost of Sales     =900,000

Creditor or Average Creditor= 90,000

Calculate Creditor payment period

Solution

Creditor payment Period =   Average Creditor x365  

                                           Cost of Sales

= (90,000/900,000) x 365

=36.5 Days (Average Payment period)