Types of Working Capital

21

7. Ratio of Working Capital Management

a. Working capital turnover ratio According to Abdullah 2005: 71 The use of working capital management can be tested using working capital turnover ratio is the total number of sales with current assets owned by a company in a given period. When the volume of sales increase, so inventories and receivables increase means that increase working capital. Formulation of working capital turnover WCT : The working capital turnover indicates the amount of net sales dollars earned for every dollar of working capital. Of the relationship between net sales to working capital, it can be known is whether the company worked with high working capital or working with low working capital. Working capital turnover ratio is also related to the companys liquidity. If the working capital turnover ratio is high, it indicates low liquidity to support operations, while if the ratio is low means high liquidity. The greater of working capital turnover ratio show the better a company. It also shows how effective Working capital Turnover = Sales Current assets – Current Liabilities 22 utilization of working capital available to improve the profitability of the company. b. Receivable Turnover Ratio This ratio measures the efficiency management of receivable in company. The higher ratio shows that working capital invested in receivables is low. Formulation of Receivable Turnover is : Sugiono, 2009;73 c. Inventory Turnover Ratio This ratio measures the efficiency management of inventory in company, and shows how many times the inventory can be spin in a year. Formulation of Inventory Turnover is: Sugiono, 2009;73

B. Liquidity

1. Understanding liquidity

Liquidity is one of the components to assess the financial of company. Liquidity is the ability of a company to meet its short term obligations as they mature Sawir, 2001: 31. If the company is able to make payments on its Receivable Turnover : Receivable Sales x 100 Inventory Turnover : COGS Inventory x 100