Calculating business turnover is one of the best measures to see business performance. According to Lauren Hellicar, “Business turnover is the number of total sales made by the business in a certain period.” Business turnover is also known as income or gross turnover. In accounting terms, “Business Turnover” calculates how quickly a business performs its operations.
More comprehensively, calculating business turnover helps you assess the firm’s culture, recruiting efforts, and culture of the organization at large. In addition, calculating business turnover enables you to identify and address the significant setbacks.
Suppose you are running a small business like a sole- proprietorship, partnership or an LLC. It is essential to calculate your business turnover to know the health of your business. Turnover calculates how fast a company performs its operations.
Turnover is generally observed by looking at how quickly account receivables turn into cash and how often the inventory sells in a given time period.
The Basic Turnover For A Manufacturing Firm
The essential turnover calculates how swiftly a company conducts its operations. The major assets owned by a manufacturing business are:
- Account Receivable
- Inventories
The accounts receivable turnover and inventory turnover ratios quickly calculate how fast a business collects cash from A/R and Inventories.
Accounts Receivable Turnover
Accounts receivable shows the total amount of unpaid client invoices at any point in time. However, keep in mind that credit sales are sales not instantly paid in cash. The accounts receivable turnover formula is credit sales divided by average accounts receivable. The average account receivable is actually the beginning and ending account balance for a particular period of time. The account receivable formula calculates how quickly we collect our payments.
Formula
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Inventory Turnover
The formula used to calculate inventory turnover uses the cost of goods sold (COGS) divided by average inventory. The purpose of calculating this ratio is to capitalize on the amount of inventory sold while reducing the inventory kept on hand.
Formula
Inventory Turnover Ratio = COGS/ Average Inventory
Turnover for an Investment Industry
However, it is worth mentioning that calculating business turnover for the investment industry is quite different from the manufacturing and service industries. The turnover of the investment industry is the percentage of portfolio sold during a specific period, for example, during a month or a year.
Turnover of A Service Industry
According to Kate Heinz, “The turnover rate in a service industry is defined as the ratio of workforces who left a firm over a period of time. In addition, it’s often described concerning employee retention rate, which measures the number of employees retained from the beginning of a set period until the end.”
Formula To Calculate Service Industry Turnover
The turnover can be calculated using this information.
The number of employees on day 1.
The number of employees by the end of a particular period
And the total number of employees who resigned/left/separated during that time frame.
Example:
XYZ Consulting — a freelance service provider — had 125 employees on January 1, 2021.
XYZ Consulting hired 25 employees and 15 of their employees got separations during the rest of the year.
On January 1, 2022, there were a total of 135 employees.
The Difference Between Profit and Turnover
If your business is a registered LLC, it is effortless for you to understand the difference between turnover and profit. All you need to do is use the accurate records to secure them for tax purposes.
To calculate gross profit, subtract the CGS from your turnover and further find net profit by deducting all the operating expenses and taxes liabilities.
Example
| No. | Description | Amount |
| 1 | Turnover | $40,000 |
| 2 | -Cost of Goods Sold | $10,000 |
| 3 | = Gross Profit | $30,000 |
| 4 | -operating expense | $ 15000 |
| 5 | =Net Profit | $ 15,000 |
The example above shows that the amount you earn by selling is turnover; after deducting all the expenses, including the tax, the amount you have in hand is profit.
Importance of Calculating Business Turnover
The fundamental turnover ratios help investors and analysts decide if a company is sound for receiving suitable investments.
Calculating account receivables aims to increase sales, drop the receivable balance, and create a sizable turnover figure.
The inventory turnover ratio is calculated to help the investors decide the level of risk. The investor will face if he is interested in providing operating capital to your business.
