What is Turnover and How to Calculate It?

Turnover is a vital indicator of a company's success. Calculating business turnover can assist you in securing capital (if you're just getting started), valuing your firm, and determining the health of your organization. 

 

It's critical to keep precise records of your sales so you can figure out how much money you're making and what your projections are for the future. Your accountant informs you that your profit margin is diminishing and that your turnover is low. 

 

But what does he mean by that? And how are you going to use this data to grow your business? We'll break down the definition of turnover in the sections ahead.

 

Also Read | Types of Economic Systems

 

What is Business Turnover?

 

The rate at which inventory or assets are sold or reach the end of their useful life is known as business turnover. It can also be used to describe the frequency with which personnel leave. Accounting turnover refers to how much money a company produces in cash, debit, or credit card transactions for a year. 

 

In most cases, though, turnover refers to net sales. Allowances, discounts, and returns are deducted from net sales. This is because sales are eaten up by refunds, discounts, and allowances for broken goods. 

 

Net sales, on the other hand, provide a more accurate picture of the quality of sales transactions than gross sales. If you don't make any adjustments, discounts, or refunds, your gross and net sales figures may be the same.

 

Turnover is the entire amount of money received by your company over some time as a result of sales of your goods and/or services. Because it doesn't take into account factors like VAT or discounts, it's also known as 'gross revenue' or 'income.'

 

Also Read | Why do we need a Financial Budget?

 

 

The Fundamentals of Turnover

 

Accounts receivable and inventory are two of a company's most valuable assets. Both of these accounts need a significant cash outlay, therefore it's critical to track how rapidly a company gets the money.

 

Turnover ratios measure how quickly a company collects money from its receivables and inventory investments. Fundamental analysts and investors use these numbers to judge whether a firm is a worthwhile investment.

 

 

What is the significance of Turnover?

 

It might be claimed that turnover only tells half the story and that net profit is the truest way to gauge financial success because it includes not only the cost of goods and services but also additional costs such as taxes and administrative fees. 

 

Turnover, on the other hand, is extremely significant as a starting point, not only for determining how to fulfill profit targets, but also for attracting investors.

 

It's also a useful figure for comparing to other figures. If your gross profit is low in relation to your turnover, for example, it may be time to look into strategies to reduce your sales costs. If, on the other hand, your net profit is low in relation to your turnover, you should consider increasing the financial efficiency of your company.

 

Also Read | What is Economic Development?

 

Calculating your Profit and Turnover

 

You should be able to rapidly calculate total sales for a certain time if your accounts are up to date. Simply subtract costs to arrive at profit; subtract all other expenses, including tax, to arrive at net profit. 

 

If your turnover is $100,000 and your cost of goods sold is $20,000, your gross profit is $80,000. After deducting operating expenses of $10,000, you're left with a net profit of $70,000.

 

Of course, turnover is not a metric of success in and of itself. Every firm will make sales, but the size of the business, rather than the turnover, determines its success. However, when compared to other measures, it can be used to determine success, and it is a useful indicator of how well a company is expanding on its own.

 

Also Read | Value Stocks

 

Difference between Profit and Turnover

 

Profit is referred to as net revenue if turnover is referred to as gross revenue. This is due to the fact that your income is made up of all of your sales, yet your earnings will be reduced by deductions.

 

Although many people mistake the two, turnover is not the same as profit in the business world:

 

1. Turnover is the overall revenue generated by your business over a given period of time – or, in other words, the net sales amount.

 

2. Profit, on the other hand, is the amount of money left over after all expenses have been eliminated.

 

It's worth mentioning that profit can be measured in two different ways. The term 'gross profit' refers to sales less the cost of the goods or services you sell - also known as the sales margin. 

 

After all expenses (such as administration and tax) have been deducted, the 'net profit' is the amount that remains after all expenses (such as administration and tax) have been deducted.

 

Other Forms of Turnover

 

You may also hear the term 'turnover' used to refer to the number of employees who leave a company over a period of time, often known as 'labor turnover' or 'churn.' 

 

It's another crucial metric, especially for larger businesses, and it'll frequently be compared to employee retention rates. When assessing turnover, businesses that give credit to customers can use the term "accounts receivable" to describe the time it takes for customers to pay their bills.

 

Also Read | An Overview of Economic Moat

 

Watch this | What is business turnover and how do you work it out?

---

---

 

Bottom Line

 

Business owners must understand their turnover, mostly so they can figure out how much money they'll need to make to reach their profit goals. If your gross profit is low in comparison to your turnover, you may want to consider strategies to lower the cost of your sales, such as renegotiating supplier contracts.

 

If your net profit as a percentage of revenue is low, you should consider how to make your company more efficient. Is it possible to save money on administrative costs, for example? 

 

Or are you certain you've claimed all of your company's authorized expenses? Learn how to prepare a balance sheet or use our budget calculator for self-employed people for other ways to conduct a business health check.