Turnover: Definition And Overview
Operating a business means there will be a lot to focus on. You want to ensure youāre doing everything you can to grow revenue to help the business grow and expand efficiently. You might have heard the term turnover before, but what exactly does it mean and how does it work?Ā
By understanding how turnover works, will you really be able to get a better sense of business performance? Read on to learn all about turnover. Weāll dive into how important it is to your business, how to calculate it, and break down an example of its use.Ā Ā
Table of Contents
KEY TAKEAWAYS
- Turnover is an accounting concept that calculates how quickly a company can conduct its general operations.
- Within the investment industry, turnover is the percentage of a portfolio that gets sold in a certain timeframe.
- The common measure of corporate turnover is to look at a series of portfolio turnover ratios that involve cash accounts receivable and inventory.
- Accounts receivable turnover shows how quickly outstanding payments are being collected compared to credit sales. This is based during a certain time period, like a year or a month.
What Is Turnover?
Turnover is a specific type of accounting concept that helps determine how quickly a business conducts operations. Usually, turnover gets used to gain insights into cash collected from accounts receivable. Or, it can get used to better understand how quickly a company sells its inventory.
Some of the most common types of turnover include:
- Accounts receivable turnover
- Portfolio turnover
- Inventory turnover
- Working capital turnover
Why Is Turnover Important to a Business?
A companyās sales turnover is important because it shows how quickly the business can conduct its daily operations. A company would use turnover to get a better understanding of the inner workings of the business and how quickly they can collect on their accounts receivable.
This is sometimes referred to as gross revenue or income.
Large turnover isnāt always a positive thing. For example, in the investment industry, funds with excessive turnover are considered to be of lower quality.
How to Calculate Turnover
Calculating your turnover is a simple endeavor. The formula for calculating turnover is as follows:
If a business sells more than one product, you can either figure out your rough turnover by getting an average cost of sales and an average sales of the product. Or you can calculate the turnover for each individual product and then add the sums together.
Example of Turnover
Letās say that Trader X sells a product with a direct cost of $10. On a monthly basis, the trader sells on average 1,000 of their products. With this information, we can work out their monthly turnover of trade.
T = 10 x 1,000
So the average monthly turnover would be $10,000.
Now if we wanted to find out the annual turnover of the trader, we can use the monthly average to calculate the yearly average turnover.
T = 10,000 x 12
So the average annual turnover of Trader X is $120,000.
It is important to note that the annual turnover figure is the sales figure before taking away expenses. These would be things such as purchase, trading costs, direct costs, and indirect costs. It is also the figure before adding non-operating incomes and other indirect incomes. That makes it a gross figure.
Summary
An accounting concept such as turnover can play an important role in business operations. Itās used to better understand how well your business collects outstanding cash from accounts receivable. As well, turnover allows you to see how efficiently you sell inventory.
In most cases, two of the biggest assets a business can own are inventory and accounts receivable. Each requires a large investment and itās equally important to measure how efficiently your business collects cash.
Turnover ratios get used by analysts and investors to help make more informed investment decisions.
FAQs About Turnover
Turnover is not the same as profit. Profit refers to your earnings that are left after expenses have been deducted.Ā
Annual turnover is the turnover that is calculated over a time period of a year.
On the balance of things, the rates of turnover are less important than profit. You can sell a large number of items at a good price, but if your expenses exceed this, then youāll be making no profit. But a turnover decrease can also see profits fail.Ā
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