What is Net Current Asset Turnover Ratio ?
This ratio shows the extent to which working capital (ie net current asset) promote the level of sales value of the business. Net current asset is also referred to as working capital and in this case, the concern is to what extent the funds for day-to-day operations propel the net sales. This ratio is calculated as follows:
Where;
Net current asset=total current assets-total current liabilities
Net sales=total sales-returns inwards
Example
From the previous example of More life co ltd for the year ended 29th/02/2020.
Additional information
Net sales for the year ended 29th/02/2020 was $8,400
Solution
Interpretation
For every 1.00$ invested in net current assets, the business generates $1.91 of sales.
Applicability of net-current asset Turnover Ratio in Decision Making by Management
Net current Asset turnover Ratio which is portrayed as
represents the efficiency that the excess current assets have on sales value.
Denominator factor; net current asset is the denominator and that is the epicenter of making decisions. The net current asset is composed of total current asset minus total current liabilities
Under current assets; the management need to monitor the changes in ALL current asset components such as cash, debtors, prepayments and inventory
Cash management
It entails many things including hard cash planning and control, accounts receivable and accounts payable. The model used is of William J. Baumol who developed a transactions demand for cash empirical representation. It was further advanced by Miller and Daniel Orr (A Model of the Demand for Money). The aim of this model is to ensure no idle cash in the business.
Inventory management
It entails Economic Order Quantity (EOQ) which involves tradeoff between carrying costs and ordering cost, the ideal cash balance is the tradeoff between cost of borrowing (opportunity cost) or holding cash and the transaction cost
Numerator factor; This factor is represented by net sales and the changes that occur in it are majorly from the changes occurring in fixed assets. So the management do not need to invest its decision making time to chant the way forward for this may result to small change in net sales.
