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Sales to net working capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Sales to net working capital

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • March 31, 2021 at 8:42 am #615575
    chughtai20
    Participant
    • Topics: 39
    • Replies: 52
    • ☆☆

    I have read that an increase in this ratio means that a company is using its funds better to generate sales. In an answer (June 2016 sample Q 1) it says that an increase from 12 times to 86 times, shows that working capital investment has not matched the increase in sales revenue. I am confused. Can you explain ?

    March 31, 2021 at 8:56 am #615578
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    For the ratio to stay the same, the sales and working capital would both need to increase by the same %.

    If the ratio has increased from 12 to 86 then it means sales have increased much more than the level of working capital has increased.

    All companies should attempt to manage their working capital efficiently (such as by collecting receivables quickly) and improving the management will increase the ratio.

    However, as sales increase you would expect receivables (and therefore working capital) to increase and for the ratio to have increased as much as in this question looks worrying and a likely sign of overtrading.

    March 31, 2021 at 12:02 pm #615592
    chughtai20
    Participant
    • Topics: 39
    • Replies: 52
    • ☆☆

    OK. Thank you !

    March 31, 2021 at 2:43 pm #615607
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Sales to net working capital’ is closed to new replies.

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