Turnover (Sales, Employee, Asset and Other)
Turnover, as an accounting term, is used in several spheres of business operations, helping to make estimations on your company. The basic meaning of turnover is sales turnover — standing for just the revenue of your company over a given period of time. There are also 2 types of turnovers defining how quickly a company conducts its operations: accounts receivable turnover and inventory turnover. You can also come across employee turnover and asset turnover. Each turnover is defined by a corresponding ratio, which is presented as a figure and can be used for internal and external analysis of your company. Outsourcing your accounting might make your analysis on different types of turnovers much easier.
Sales turnover (also sometimes called overall turnover) is the revenue you get from your customers for selling them goods and services. When the sales turnover is counted, the calculations include only revenue you get from your business’ day-to-day activities. And sales turnover figure is that before the deduction of taxes and trade discounts. Most commonly, sales turnover is counted on a yearly basis and is usually analyzed on a trend line of sales levels.
Accounts receivable turnover
Accounts receivable turnover is about how quickly your business collects cash from customers, compared to your credit sales. It is reflected in the following formula: credit sales divided by the average accounts receivable. Credits sales are the sales that are not immediately paid by the customers, while the average accounts receivable is the average of the beginning and ending accounts receivable balances for a certain period of time (for example, a month or a year).
Let’s have a look at an accounts receivable turnover ratio example.
Beginning accounts receivable — £100,000
Ending accounts receivable — £200,000
Average accounts receivable —
(£100,000 + £200,000)/2 = £150,000
Net Credit Sales — £1,000,000
Applying the formula:
£1,000,000/£150,000 = 6,6
and that is the accounts receivable turnover ratio.
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Inventory turnover shows how fast your company sells the inventory it has. This rate is calculated by dividing the cost of goods sold (COGS) by the average inventory.
Let’s have a look at an inventory turnover ratio example.
Beginning inventory — £95,000
Ending inventory — £100,000
Average inventory —
(£95,000 + £100,000)/2 = 97,500
Cost of goods sold (COGS) — £600,000
Applying the formula:
£600,000/97,500 = 6,1
and that is the inventory turnover ratio.
Employee turnover may also be called staff turnover and it is the percentage of employees who leave your company and are replaced by new employees. It is useful to analyze reasons for the turnover and also estimates the cost-to-hire for budget purposes. Employee turnover can be counted on many levels, based, for example, on the factor if the employees left themselves or were fired. The basic formula is dividing the number of employees who left the company by the average number of employees, this figure further multiplied by 100 to get a percentage figure.
Let’s have a look at an employee turnover ratio example.
Number of employees — 100
Number of employees who were fired or quit — 15
Applying the formula
your employee turnover is 15%.
The figure for asset turnover shows the company’s sales for a particular period compared to the value of its fixed assets (such as property, machines, etc.). The formula that counts your asset turnover is known as the asset turnover ratio and to count it, you need to divide your company’s net sales by the average total assets.
Let’s have a look at an asset turnover ratio example.
Beginning total assets — £3,000,000
Ending total assets — £5,000,000
Average total assets —
Total revenue — £10,000,000
Applying the formula:
£10,000,000/£4,000,000 = 2,5
and that is the asset turnover ratio.
Does turnover include VAT on Income Statement?
Turnover is stated on your income statement. It should exclude VAT.
How do you value a business based on turnover in the UK?
You should start with the average weekly sales. You will get that figure if you take your total turnover to date for your current financial period. If you have it, add your turnover for previous financial period too. Next, divide that sum by the number of weeks in that period. Don't forget to exclude VAT while calculating your average weekly sales.
What does high employee turnover mean?
This means that a lot of employees leave your company in a given amount of time. In case of low employee turnover, your workers tend to stick around and the workforce is stable.
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