Turnover (of assets) — sales of the company within a given period, usually a month or a year. It is often used as a synonym for revenue. A business can also have inventory turnover and turnover of employees.
Why is turnover important?
Turnover is crucial to understand how fast can a business collect cash which in turn affects two of the most important (and largest) business assets: accounts receivable and inventory. Accounts receivable are all the outstanding invoices your customers owe you. Inventory turnover shows how fast you move your goods as opposed to what you keep in stock. The turnover ratio evaluates how quickly a business harvests cash on these two assets. It shows whether a company will be a good investment.
How to calculate Turnover formula
- To calculate Accounts receivable (A/R) turnover, you need to divide credit sales by the average A/R. credit sales is everything your customers owe you. Average A/R is based on the beginning and the end of the period A/R number.
- Inventory turnover is COGS divided by average inventory. COGS stands for Cost of Goods Sold, everything you sold within the time period. The average is whatever you have in stock for the same period. If you sell vacuum cleaners and you moved S$10,000 worth of them within a month (cost, not price), you divide it by the cost of your stock, say, S20,000. Then your turnover rate is 0,5 and you move your inventory 6 times a year.
- Portfolio turnover relates to investment. It’s calculated as follows: assets sold within a period divided by the total assets managed.