From the outside, owning a business may seem like an exciting and easy way to generate an income. Equipped with the internet’s limitless capabilities, starting your own enterprise is as easy as creating an email account. You just need a platform, reliable product supplier, and marketing techniques to carve out your name in your chosen industry. However, thinking about it and actually doing it are hardly the same.
Running a business is far from what you see on TV shows and movies. You have to consider multiple factors and make difficult decisions before you can even pierce the very bottom part of the industry. It is an overwhelming and stressful endeavor, especially when it comes to profit, income, and pretty much anything that has something to do with money.
It is understandable to want to know the health of your business; how it is performing in terms of cash flow and what you can do to increase it. A good indicator of how well your business is doing is through business turnover.
What Is A Turnover?
The term turnover encompasses many definitions depending on the industry you are in. But in business, turnover is the overall sales generated by your business over a specific period. To put it simply, it is the amount of money your company made within a year or two.
Turnover represents the net sales figure of your company and is often used as a measurement of its performance. It is a calculated concept used to understand how quickly and efficiently a company conducts its operations. Such operations include the collection of cash and other large assets such as accounts receivable and stock inventory.
Turnover is also known as gross income or revenue, but it is not the same as the term profit. Although the two terms have been used interchangeably, gross income and profit differ from each other. For one, profit is the residual earnings left after all expenses have been deducted. While gross income is the total income of the company sans deductions.
To complicate things further, here are the different turnover definitions in the business industry.
- Employee Turnover
Employee turnover is the loss of laborers in a specified period. It refers to the proportion of workers who leave a company and the number of new employees. Insights into an enterprise’s hiring and firing rate are essential as it affects the company’s morale, productivity, and overall operations. Whether it is because of employee dissatisfaction or cutbacks, a company should look into the causes of their high rate of replacement and address it quickly.
Hiring new sets of employees every period requires money and effort that a company cannot afford to lose. What they need to do is prioritize professional development, reasonable compensation, and value their human capital.
- Accounts Receivable Turnover
Accounts receivable is the amount of money owed to a company by debtors or those who purchased goods by credit. Its throughput rate measures the number of times a company collects its average accounts receivable. It shows the ability of an establishment to effectively issue and collect the credit owed to them.
A high yield rate means that you have an effective credit policy in place with many quality consumers. While a low receivables rate is due to a loose credit policy and inefficient collections department. It also shows a large amount of bad debt, which can cause major implications for the business.
- Inventory Turnover
Inventory turnover is a ratio that describes an organization’s efficiency in managing its inventory for a certain period. It measures the number of times a company sold and replaced their inventory (goods and products).
The ultimate goal is for an enterprise to successfully increase the number of inventory sold and minimize the inventory on hand. The inventory rate helps owners and analysts to make big decisions such as pricing, marketing, manufacturing, and the purchase of a new inventory.
To calculate it, accountants get the number of sales and divide it by the average inventory; wherein the average inventory is the sum of the beginning and ending inventory, divided by two.
In conclusion …
Business owners need to get acquainted with their company’s turnover. It is an important aspect to understand, especially during profit assessments and financial statement preparations. To understand this better, you might need expert help – and that’s what we’re here for! Don’t be afraid to reach out to Annette & Co. for free business advice!