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Cash Turnover

Cash Turnover – a ratio measuring the amount of times that the company’s cash has been spent through over certain period of time. In other words, it measures the frequency of company's cash account replenishment through the sales revenue. The most precise estimation of the cash turnover can be done for businesses, which have nearly all of the sales in cash. If a company has an active credit policy of providing its customers with consumer loans, the cash turnover ratio may give a wrong signal and reflect that the company's cash replenishment is more frequent, than it actually is. Too high ratios may witness financial problems of a company, indicating that it is low on cash.

Formula(s):

Cash Turnover = Sales ÷ Average Cash and Cash Equivalents

Cash Turnover = Sales ÷ Average Cash and Cash Equivalents and Marketable Securities

Example:

Cash Turnover (Year 1) = 3351 ÷ 51 = 65,7

Cash Turnover (Year 2) = 3854 ÷ 43 = 89,6

Cash Turnover ratio has increased from 65,7 in year 1 to 89,6 in year 2. This indicates the increase of the efficiency of company’s cash usage, because this means firm starts turning its cash over more frequently.

Conclusion:

By comparing cash turnover ratio over certain period of time one can make a conclusion on the changes in company's cash turnover efficiency. The increase of the ratio indicates the increase of the efficiency, which reflects in faster regular replenishhment of company's accounts with cash, generated through sales. Normally more frequent turnover of cash is better, because it means cash is being actively used for the generation of returns.