Cash Turnover Ratio (CTR)

What is the Cash Turnover Ratio (CTR)?

The cash turnover ratio (CTR) is an efficiency ratio that shows the number of times cash is turned over in an accounting period. The cash turnover ratio works most effectively for companies that do not offer credit sales.

Formula for the Cash Turnover Ratio

The formula for calculating the cash turnover ratio is as follows:

Where:

• Revenue is a company’s income and can be found on the income statement
• Cash and Cash Equivalents are the most liquid assets on a company’s balance sheet.

Generally, line items taken from the balance sheet should be averaged. Therefore, cash and cash equivalents should be an average amount of the last accounting period and the current accounting period.

Example of the Cash Turnover Ratio

It is currently 2014 – John is a business owner looking to gain a better understanding of his company’s cash management on a trended basis (2013-2014) by using the cash turnover ratio. The following is a partial balance sheet and income statement of the company:

The company’s 2013 cash turnover ratio is calculated as $118,086 / (($150,000 + $181,210) / 2) = 0.71x.

The company’s 2014 cash turnover ratio is calculated as $131,345 / (($181,210 + $183,715) / 2) = 0.72x.

From 2013 to 2014, the company’s cash turnover ratio slightly improved. Therefore, the company’s cash management marginally improved year over year.

Interpreting the Cash Turnover Ratio

The cash turnover ratio indicates how many times a company went through its cash balance over an accounting period and the efficiency of a company’s cash in the generation of revenue. Additionally, the cash turnover ratio is often used by accountants for budgeting purposes.

A higher cash turnover ratio is desirable, as it indicates a greater frequency of cash replenishment through revenue. However, it is important to note that there is no one ideal cash turnover ratio number. As with other ratios, it should be compared to competitors and industry benchmarks.

Days Cash Replenishment

Extending the cash turnover ratio by dividing 365 by the CTR provides the number of days, on average, that it takes for a company to replenish its cash balance. This formula is as follows:

For example, if a company reports a cash turnover ratio of 2, the days it takes for cash replenishment would be 365 / 2 = 183.

Drawbacks of the Cash Turnover Ratio

The key drawback of the cash turnover ratio is that it does not account for credit sales, which are sales made by customers in which the payment is delayed. The cash turnover ratio is most appropriate for companies that do not offer credit sales. Using the cash turnover ratio for companies that offer credit sales skews the CTR by making it larger than it really is.

Additionally, accumulating cash for future acquisitions skews the cash turnover ratio lower. The CTR is best used if the company’s cash balance year-over-year does not see significant changes.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Asset Turnover Ratio
• Financial Analysis Ratios Glossary
• Ratio Analysis
• Types of Budgets
• See all accounting resources