What Is Turnover of a Company and Its Effects

In the accounting world, the word ‘Turnover’ is used frequently. Many people need clarification regarding what is turnover of a company is. Turnover reflects how quickly a business performs its operations and earns revenue. A company is profitable when it has a high turnover rate.

Annual turnover is an important part of all businesses. It would help you to understand how well your company is performing. The annual turnover meaning in different countries is the revenue earned. It is crucial to understand what is turnover of a company is to know about the financial health of the company.
This article will discuss what is turnover in a company and how it affects the company.

What is the Turnover of a Company

Let’s understand what is the turnover of a company. Turnover is a financial concept that calculates how quickly a business performs its operations. The company looks to make more money, pay the bills, and have a high turnover rate.

Turnover calculates how fast the company sells its inventory or collects the money from accounts receivable. For example, if the monthly credit sales of a company are Rs 20,00,000, and the account receivables are Rs 4,00,000. So, what is the turnover of a company? The turnover rate of the company is five.

After understanding what business turnover is, let’s know the importance of turnover.

• The business turnover helps to understand the financial status of the company.
•  It helps to forecast their business sales as per the current turnover.
• The business turnover helps to identify the lower areas. This would help them to work on it and improve it.
• The turnover helps to understand the risks attached to the company. This would give a clear picture to the investors of whether they should invest in the company.

Different Types of Turnovers

If you want to understand, what is turnover of a company is, it is important to look at different types of turnover in business:

Accounts Receivable Turnover

The accounts receivable turnover is also known as the debtor’s turnover. The accounts turnover ratio calculates how the company collects its revenue and uses its assets. This turnover calculates the times the company collects its accounts receivable in a given timeline. This assesses how efficiently the company uses its credit given to the consumers and its recovery. 

A company is considered profitable with a higher accounts receivable turnover ratio. This ratio compares two companies in the same industry. A company with a better accounts receivable turnover ratio is considered profitable. This gives a clearer picture to the investors before investing.

Accounts receivable turnover = (Net credit sales / Average accounts receivable)
Net credit sales = Sales on credit – Sales returns – Sales allowances
Average accounts receivables = (Starting accounts receivable + Ending accounts receivable) / 2.

The net credit sales are the sales from the cash collected at a later date. The account receivable ratio provides a detailed analysis of the company’s financial and operational performance. 

A higher ratio indicates the company has a good customer base that pays its debts on time. A low ratio indicates the company has been extending its credit policy longer. The low ratio reflects the customer still needs to pay their dues. This needs to reflect better on the company’s financial performance.

Inventory Turnover

The inventory turnover is also known as the inventory turnover ratio. This ratio indicates the number of times a business sells and replaces its goods in a given timeline. The ratio considers the cost of all the goods sold compared to the average inventory for the given timeline.

The inventory turnover can help the company make informed decisions on different business operations like.

• Pricing
• Marketing
• Purchasing
• Manufacturing 
• This ratio indicates how efficiently a company is using its assets

Inventory turnover ratio = (COGS/Average value of inventory)
COGS – The cost of goods sold is the cost of the entire sales.

The inventory turnover can be compared to different turnovers to analyze competitiveness. This would also help to understand the intra-industry performance. 

The different turnovers are

• Planned ratios
• Financial turnover ratios
• Historical turnover ratios

A company is said to have good financial health if its inventory turnover is higher. This indicates the goods of the company are sold faster. If the inventory turnover is lower, it indicates the goods are sold slowly. It also indicates there is a surplus of inventory. So, the company has to manufacture according to their sales. This would help in maintaining a healthy inventory turnover ratio.

Sales Turnover

The sales turnover shows how much revenue a company generates from regular operations. This turnover is calculated after deducting the income of its non-operating revenue. Companies measure their sales turnover in regular intervals like monthly, quarterly, or annually. 

The sales turnover can be calculated using the following variables.

• Starting inventory.
• Extra inventory expenses.
• Ending inventory.
• Cost of Goods sold (COGS).
• Average inventory.

Understanding the sales turnover is important for many reasons. Let’s look at some of them.

• It predicts the common revenue of the company.
• It provides an estimation of returns on the business.
• It assists in determining financial trends.
• It reflects the company’s growth and success rates.

The sales turnover is different from the inventory turnover. The sales turnover focuses on the sales during a particular sales period. The inventory turnover focuses on the quantity of inventory sold during that period.

Portfolio Turnover

Portfolio turnover ratio = (Min. of securities brought or sold/ Avg net assets) x 100

• The smallest securities brought or sold is the total amount of new securities purchased or sold in a given timeline.
• The average net assets state the average monthly amount of net assets in the fund.

Investors should consider portfolio turnover before investing in any financial scheme. If the potential turnover is high, it provides higher capital gain taxes. The amount is distributed to the investors, who must pay taxes for these revenue gains. The turnover should be above 30%.

If the potential turnover is lower, the fund manager is buying-and-holding strategy. These funds are known as passively managed funds. The low turnover is considered to be lower than 30%.

These provide a clear picture of the turnover of a company and its importance in understanding the financial strength of the company.

How Does the Turnover of a Company Impact Its Success

It is not essential to understand a company’s turnover, but how it affects a company. After understanding the turnover meaning, let’s look at how turnover in business affects a company.

Provides the Company’s Financial Health

The business turnover helps to understand the financial and operational status of the company. This gives an understanding of the company’s performance.

Forecasting Sales

By analyzing the business turnover, the company can forecast its future sales, divide costs, and the amount of inventory to be manufactured.

Also Read: Net Profit: Understanding Its Significance for Your Business

Identify the Improvement Areas

The business turnover would reflect the areas that have a lower rate. This would help the company to work on it. They can improve the ratings by filling in the gaps.

Understanding the Risk

For an investor, knowing the turnover of the company is essential. It helps to determine the risks involved in the company. Low turnover is a red flag, and investors can avoid investing in the company.

Turnover vs Profit 

Differentiating Factors	Turnover	Profit
Definition	Turnover is the net sales. It is the total income the company makes.	Profit is the total income after all the expenses have been recovered.
Significance	Turnover does not account for any investments. It is used to calculate the organization’s sales efforts.	Profit provides an understanding of how much income is earned after all expenses have been incurred.
Usage	Turnover does not account for any investments. It is used to calculate the organisation’s sales efforts.	Several companies use the profit to understand where the company is standing. The budget is allocated according to the profits.

Turnover vs Revenue

Let’s look at some differences between turnover and revenue.

Differentiating Factors	Turnover	Revenue
Significance	Turnover provides the number of times the business uses its product to earn income.	Revenue provides the quantity of the product sold per the prices.
Usage	Many companies use turnover to analyse their performance and efficiency.	The revenue listed in the income statement is required for financial calculations.
Types	There are three types of turnover – inventory, accounts receivable, and assets.	There are two types of revenues – operating and non-operating.

The Significance of Turnover

So, what is the turnover of a company? Turnover in business is important as it helps to understand the company’s financial health. The turnover provides analysis for forecasting sales. It helps to identify the weaker parts. It gives details on the risk factors involved in investing in a business. The annual turnover helps an investor understand the operational and financial strength before investing.  The significance of turnover lies in its ability to provide valuable insights into your workforce. It serves as a critical metric for evaluating the stability, efficiency, and overall health of your company. By analyzing turnover trends, you can identify patterns, pinpoint potential issues, and take proactive measures to address them.

Understanding the significance of turnover empowers you to make informed decisions regarding talent acquisition, retention strategies, and organizational development. By prioritizing employee satisfaction, implementing effective retention initiatives, and nurturing a supportive work culture, you can minimize turnover, attract top talent, and position your company for long-term success.

Innovative, low-investment ideas for the hidden entrepreneur in you! Explore our guide on Business Ideas.

Frequently Asked Questions(FAQs)