Capital turnover

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Capital turnover is an economic process in which working capital takes the form of a commodity equivalent or means of production, and then returns to its monetary equivalent. The purpose of turnover: profit and an increase in working capital. The movement of capital takes place during a certain period of time, within which the entire advance value passes through the stages of production and circulation [1].

Features of capital turnover

As an economic category, widely used in modern business practice, capital turnover is characterized by the following main features [2] :

  • The turnover of capital is the most important condition for its functioning in the economic system, ensuring the constant generation of income or self-growth of its value. If capital had not made a constant turnover in the process of its use with the modification of specific forms, it could not bring income to its owner.
  • Capital turnover as a process of its constant movement is characterized by certain repeated cycles. The cycle of capital turnover is understood as the process of complete completion of the cycle of its individual forms, as a result of which the advanced capital in the process of its economic use returns in its original form. Taking into account the above concept, the turnover of capital in the process of its use can be viewed as a set of constantly recurring of its circulation (its circulation) or as a constant change of individual cycles of its turnover).
  • In the composition of each full cycle of capital turnover (or the complete cycle of its circulation), its separate stages are distinguished. The stage of turnover (turnover) characterizes the period of capital in one of its specific forms before its transformation into a different functional form. Features of the economic use of various types of capital determine the specificity of the content of its turnover cycles in the context of individual stages (forms of functioning in the process of individual acts of the circuit). The most significant differences in the stages (forms) of the circuit are inherent in the capital used in the production and investment process.
  • Capital used in the production process (as a factor of production), during its circulation, operates in three main forms - monetary, productive and commodity.

Forms of capital turnover

Capital exists in various forms:

  • Money
  • Productive
  • Commodity

Initially, it acts in cash. This is money capital, its role (function) is to create the necessary conditions for the production of material goods. Having money, an entrepreneur acquires the necessary factors of production in the market: labor power, means of production, and a land plot. Another form of capital is productive capital, whose function is the rational consumption of acquired factors in the production process; the creation of goods with a public use value and a value containing surplus value and profit. The third form of capital is commodity capital, its role and function is in the realization of the goods produced and the value and surplus value contained in them, that is, the transformation of commodity capital into money.

The duration of capital turnover is influenced by the following main factors:

  • Ratio of fixed and working capital
  • The ratio of active and passive parts of production fixed assets
  • Working capital structure
  • Used methods and depreciation rates for fixed assets and intangible assets
  • Average duration of the production (operating) cycle
  • The ratio of real and financial investment
  • Stage of the commodity market conjuncture, which determines the intensity of sales of products.

Capital turnover time

Capital turnover time is the time from the beginning of the advance value movement to the time it is returned to the entrepreneur in the same form, but increased by the value increment value. Includes production time and circulation time, collectively forming the capital turnover time [3]. The time of capital production has the following components:

  • working period (the period of the direct impact of labor on the product being created);
  • time of natural breaks in work;
  • stock storage time.

Examples of Capital turnover

  • In the banking sector, capital turnover is the process of making loans to businesses and individuals who then use the funds to purchase goods and services and pay back the loan. This process allows banks to generate profits from the interest payments they receive over the life of the loan.
  • In the stock market, capital turnover refers to the process of buying and selling shares of stocks for a profit, which is the difference between the purchase price and the selling price. Investors can use this process to generate income from the fluctuations in the stock market.
  • In the real estate market, capital turnover refers to the process of buying and selling properties for a profit, which is the difference between the purchase price and the selling price. Real estate investors can use this process to generate income from the fluctuations in the housing market.
  • In the manufacturing sector, capital turnover describes the process of producing goods or services, which are then sold to customers. The profits generated from the sale of these goods and services are then used to purchase materials and supplies, pay wages and salaries, and invest in other capital investments.

Advantages of Capital turnover

Capital turnover offers significant advantages for businesses, including:

  • Increased efficiency - Capital turnover enables businesses to use their resources in the most efficient way, allowing them to generate more revenue and profits. This, in turn, can be used to reinvest in the company and grow its operations.
  • Reduced costs - By streamlining the production process, capital turnover can reduce the cost of production, resulting in lower costs for the company. This can help businesses save money and increase profits.
  • Improved cash flow - By optimizing the use of capital, businesses can improve their cash flow, allowing them to have more funds available for operating expenses and investments.
  • Increased profits - By increasing efficiency and reducing costs, capital turnover can lead to increased profits. This can help businesses reinvest their profits and grow their operations.

Limitations of Capital turnover

Capital turnover can be limited by a number of factors. These include:

  • The amount of available capital: The amount of capital available to businesses can affect their ability to turn over capital. If there is not enough capital to invest in new production and circulation activities, then it may limit the amount of turnover.
  • The efficiency of operations: Capital turnover can also be affected by the efficiency of a business’ operations. If a business’ operations are not efficient, then it may take longer to turn over capital, resulting in reduced profits and a decrease in working capital.
  • Market conditions: The market conditions that a business operates in can also affect its ability to turn over capital. If the market is volatile, then it can be difficult to accurately predict when and what products or services will be profitable. This can limit the amount of capital that can be turned over.
  • Government regulations: Government regulations can also limit the amount of capital that can be turned over. These regulations can include taxes, tariffs, and other restrictions that can limit the amount of capital that can be used in a given period of time.

Other approaches related to Capital turnover

Capital turnover is a complex economic process that involves the movement of capital through different stages of production and circulation. There are a number of different approaches to understanding and analyzing capital turnover, including:

  • The Quantity Theory of Money: This approach focuses on the relationship between the amount of money in circulation and the value of goods and services in an economy. It suggests that an increase in the money supply leads to a decrease in the value of money and an increase in the prices of goods and services.
  • The Theory of Interest Rates: This theory suggests that changes in the rate of interest can affect the amount of capital available and the rate of capital turnover. It states that a higher rate of interest encourages investment and increases the amount of capital available for circulation, while a lower rate of interest discourages investment and decreases the amount of capital available for circulation.
  • The Theory of Investment: This theory suggests that changes in the amount of investment can affect the rate of capital turnover. It states that a higher level of investment can lead to increased capital turnover, while a lower level of investment can lead to decreased capital turnover.
  • The Theory of Credit: This theory suggests that changes in the amount of credit available can affect the rate of capital turnover. It states that an increase in the amount of credit available can lead to an increase in the rate of capital turnover, while a decrease in the amount of credit available can lead to a decrease in the rate of capital turnover.

In summary, capital turnover is a complex economic process that involves the movement of capital through different stages of production and circulation. Different theories have been developed to analyze and understand the process, including the Quantity Theory of Money, the Theory of Interest Rates, the Theory of Investment, and the Theory of Credit.

Footnotes

  1. ↑ Warrad L. (2013), p. 117
  2. ↑ Suryopratomo B., Komariah S. (2013), p. 4-5
  3. ↑ Passarella M., Baron H. (2013), p. 18


Capital turnover — recommended articles
Capital property — Gross investment — Austrian theory of money — Non-operating expense — Capital flow — Global demand — Economic obsolescence — Baumol model — Physical asset

References

Author: Valeriia Nezdolii

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