Sources of Working Capital Use of Working Capital

20 There are two fundamental principles in the management of operational funding working capital Horne, 2005: 313, namely: The ability to earn income is inversely related to liquidity and the ability to earn profits in line with risk. Control the exact amount of working capital will ensure the continuity of operations of the company efficiently and economically. When working capital is too large, then the funds that are embedded in the working capital requirement exceeded, resulting in idle funds, because these funds could be used for other purposes in order to increase profits. Targets to be achieved from working capital management is Sawir, 2005 : 133 : a. Maximize the value of the company by managing current assets so that the level of margin return on investment return on investment is equal to or greater than the cost of capital used to finance the current assets, b. Minimize the cost of capital used to finance the current assets in the long term, c. Control of the flow of funds in the current assets and the availability of funds from debt sources so that the company can always meet its financial obligations as they fall due Sawir.2005: 133. 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