Importance of working capital rotations for a Business
Let’s imagine you start with a working capital of $10000. You invested the complete amount in buying some stock. And let’s assume there is a fixed profit margin of 10% when you sell the stock. Let’s say you take one month to sell the entire stock. So your sale at the end of the month is $10000 and your profits are $1000.
Now let’s say, after a few months you learn to sell the entire stock within 15 days. You once again buy the stock for $10000. let’s not consider re-investment at this stage. Which means at the end of the month you have sold $20000 and your profits are $2000. Assuming you just kept the profits with yourself without putting it to work.
Can you see where we are going? Now let’s say you somehow learn to sell off your stock every single day. Which means even if considering you take a break on Sundays, your sale at the end of the month will be a whopping $260,000 and profits will be a huge $26000.
One important thing you need to observe is that the working capital is the same. Business is the same. The only thing that changed is the way you churn your working capital.
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Founder & CEO
Written on 22nd November 2018