Business Turnover: Definition, Importance, and Its Impact on Your Business

Company management and financial professionals use various types of business turnover ratios to gauge the fiscal health of the company. The meaning of business turnover pertains to the sales generated by a company during a specific period or the rate at which an asset (inventory or labour) is replaced or used. Simply put, understanding what is turnover in a business is critical to gauge its operational scale and efficiency. This article offers a thorough guide to understanding what is turnover in business and its varied implications.

What is the Meaning of Turnover in Business?

Let’s first understand the meaning of turnover in business. Turnover is a concept in accounting that refers to the rate at which a company’s assets or inventory are sold and replaced over a given period of time. Turnover meaning in finance refers to the number of times the assets of a company revolve during a specific accounting period. Simply put, turnover rates are generally used to determine how quickly a business converts its accounts receivable into cash or sells its inventory. In other words, a company’s turnover calculates how quickly it conducts its operations, measuring the efficiency of the business and helping business owners understand how well the venture is utilising available resources.

Why is Business Turnover Important?

The turnover rate of a company is a powerful metric used to gauge the financial standing of the business. Here’s a quick overview of the importance of turnover in business:

• Sales Performance: A high inventory turnover ratio indicates strong sales performance, meaning that the company can quickly convert its assets into revenue. 
• Operational Efficiency: A high turnover ratio also indicates operational efficiency in managing assets and accounts receivables to ensure smooth operations. 
• Cash Flow Management: Consistently strong turnover ratios indicate steady cash flow which can be leveraged to boost growth and business development. 
• Gauge Financial Standing: Since business turnover helps organisations understand how much they earn within a given period, it can help them better assess the financial stability of the venture and how well it is performing. 
• Accurate Forecasting: By calculating turnover, businesses can better forecast future sales. This can help them understand how to better allocate costs and optimise operations to boost profitability and competitiveness. 
• Make Strategic Adjustments: Assessing business turnover ratios can help businesses identify areas of strategic improvement to enhance performance. 
• Sway Investor Confidence: Investors often assess various types of business turnover ratios to evaluate investment options. Strong turnover ratios can communicate growth potential and stability, boosting investor confidence.  

Understanding Common Types of Business Turnovers and How To Calculate Them

Here’s a list of the common types of business turnovers to help you better understand the meaning of turnover in a business: 

Accounts Receivable Turnover

Accounts receivable represents the amount of unpaid invoices from customers at any given moment. To compute the accounts receivable turnover ratio, you must divide net credit sales divided by the accounts receivable average. First select the accounting period which may be a month, quarter, or a year. Add the accounts receivable from the beginning of this period to the number at the end of the period and divide the result by 2 to attain the average accounts receivable. For instance, if your credit sales for a month is Rs. 50,000 and the account receivable balance is Rs. 20,000, then the turnover rate for this period is 2.5. This turnover ratio essentially indicates how quickly you collect payments vis-a-vis your credit sales. A high rate means timely payment collections by the company.

Inventory Turnover

Inventory turnover indicates how quickly a company sells its inventory to customers. A higher inventory turnover ratio highlights that the company sells its inventory quickly to customers, before the holding costs become significant. Inventory turnover rate is calculated by dividing the cost of goods sold by the average inventory. Generally, inventory turnover is also known as sales turnover and helps investors gauge the risks associated with providing a business operating capital. The goal of any business owner is to sell as much inventory as possible and maintain minimum stock. For instance, if the cost of sales every month is equal to Rs. 2,00,000 and you have Rs. 50,000 in inventory, your turnover rate is 4 which means your business has sold all of its stocks 4 times that month. 

Portfolio Turnover

Portfolio turnover is relevant to investments made by the business. It measures how quickly a company buys or sells fund securities. Essentially, portfolio turnover sums up how frequently a security changes ownership. A higher portfolio turnover indicates more trades, signalling higher taxes and investment costs. 

Asset Turnover

Asset turnover ratio sums up how well a business uses its assets or working capital to get sales. It measures how well a company produces revenue from its total assets in a given year. Here’s how you can calculate turnover of a company in terms of asset utilisation: 

Asset Turnover = Total Sales/Average Working Capital

High asset turnover ratio can suggest efficient management and optimised cash flow. Therefore, investors use asset turnover ratios to compare companies in the same sector and make informed investment decisions.

Relevance for Various Stakeholders

Now that we’ve covered what is turnover and its significance for your business, let’s understand how this accounting concept is relevant for various stakeholders. Investors utilise the sales turnover of a company to gauge its profitability and make investment decisions. Similarly, creditors assess the repayment capacity of the business based on its turnover ratios since these ratios demonstrate the efficiency of the enterprise. For instance, if the business has a high inventory turnover ratio, it may indicate steady cash flows and better repayment capacity, lowering the creditor’s risk. Portfolio turnover ratios are also used by business owners to make investment decisions to fund future growth. Essentially, the various types of turnover ratios play a critical role in helping stakeholders make informed business decisions.  

What is the Difference Between Turnover and Revenue

The key differences between turnover and revenue are outlined in the table below:

Difference Between Turnover and Profit

While both turnover and profits are essential financial indicators that measure the company’s financial performance, they include some basic differences:

Turnover of a company means the total revenue that the business generates from the sales of its products or services within a given period of time without having deducted the costs incurred in the production of the goods and services. The total turnover of the company is generally outlined at the top of the firm’s income statement and measures the company’s selling power and market reach. 

Profit, on the other hand, is the net income left over from the gross revenue after all operating costs, taxes, interest, and other expenses have been deducted from the company’s sales. Profit of the business is often outlined at the bottom of the income statement. 

The Bottom Line

In a nutshell, turnover in a business means how efficiently the business manages its resources and assets. Businesses have many types of turnovers to measure various aspects of operational efficiency, but the most common ones remain inventory and accounts receivable. While the former indicates how fast the company sells its entire inventory, the latter highlights how quickly it collects payments. Investors consider total turnover of a company to assess its efficiency and possible profitability to make informed decisions.