What is Turnover in Business: Meaning, Calculation, & Financial Significance
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What is Turnover in Business? 

Business turnover refers to the amount of sales or revenue any organisation earns. It determines how easily transforming goods or services into cash flows is. For this reason, understanding turnover is important in checking the company's financial health and growth prospects.

In addition, it also plays a vital role in the credit lending process. To apply for a Kotak Mahindra Bank Business Loan, you will need to understand the meaning of turnover and know how to calculate a company's turnover.

More about business turnover

Understanding the meaning of turnover in business is critical in measuring the health of a company and how it performs. Hence, understanding different factors affecting turnover can be crucial when discussing turnover in business. It should, therefore, be taken as a pivotal part of financial assessment and management.

 It consists of all sales of goods or services. It is a fundamental indicator of a business's financial performance. So, when you look for the meaning of turnover, think of it as the financial heartbeat of a company. It reflects the ability of any business to grow and succeed.

The Importance of Turnover

Turnover can be a powerful measure of a firm’s financial standing. Every business must understand that it is not merely a number. It is a potential parameter for applying for a Kotak Mahindra Bank Business Loan. It is crucial to understand the significance of turnover in business.

Assessing a Company's Financial Health:

Turnover is important in the evaluation of the financial health of the company. It gives an overview of how profitable a business is. A healthy turnover implies high sales volumes at a constant rate. This means that the firm sells its products and services profitably.

Relevance for Investors, Creditors, and Business Owners: 

Turnover provides insights into future profits that investors utilise in their calculations. It serves as an evaluation tool for creditors on the ability of a business to repay. It also helps business owners make investment decisions and optimise their operations to prepare for future growth. However, a company’s turnover is not merely a financial indicator but a guide that takes stakeholders in the right direction regarding their business decisions.

How to calculate the turnover of a company

A company's turnover provides vital information about its performance.

Here's how to calculate the turnover of a company:

1. Gather Financial Data:Begin by obtaining your company’s annual revenue records in the first place.

2. Choose a time frame: 

Identify the duration you want to evaluate turnover for

3. Interpret the result:

Turnover means the amount your organisation earns within a specified period, which equals the calculated value. 

Common Types of Turnovers Include:

1. Accounts Receivable Turnover:

Turnover of accounts receivable reveals the efficiency with which the company handles unpaid invoices given by customers. The accounts receivable turnover ratio is determined by net credit sales divided by the accounts receivable average. A high rate of turnover means timely payments collected by a company.

2. Inventory Turnover:

The inventory turnover measures how well a firm administers its inventory. The cost of goods sold is divided by the average balance in inventory and expressed in days. The high inventory turnover indicates they can sell their products before the holding cost becomes significant.

3. Portfolio Turnover:

However, when it comes to investment, portfolio turnover becomes applicable, especially on the issue of mutual funds. It measures how frequently the securities held in a particular portfolio change ownership. Higher portfolio turnover implies more trades, which may increase investment costs and taxes.

4. Working Capital Turnover:

Working Capital turnover shows how well a firm utilises its Working Capital to get sales. This is determined by dividing net sales by the average Working Capital. Working Capital turnover indicates that there is maximum efficiency in putting money to use for income generation.Such types of turnover give insight into different sectors of financial affairs in any given organisation so that business people and investors can form opinions for decision-making and strategy enhancement.

Differences Between Turnover and Revenue

Business Turnover is sometimes mistakenly confused with revenue. The latter is equivalent to sales of goods and services within an interval. It is a major financial measure that assesses how well a firm converts its offerings into revenue. If you compare revenue vs. turnover, revenue is usually gross income, but turnover could be net sales minus deductions.

Let's do a further comparison of revenue vs. turnover for a better understanding: 

  Revenue Turnover

Financial Reporting

Revenue refers to the overall income an organisation generates by selling goods and rendering services. The first line of an income statement is net sales, which are revenues received in a business before any reductions.

Financial reporting may include a more elaborate discussion on turnover. Such figures could also be beyond sales and may include returns or allowances. Turnover could also represent a superior expression of earnings generated through the fundamental business activities executed by the entity itself

Planning Future Business Activities

Revenue is usually an extensive measure that a company’s financial well-being can be judged by when considering further business operations that a company might engage in. This, in turn, assists firms in determining targets, evaluating sales patterns, and decision-making.

Turnover provides an understanding of the efficacy of sales operations. It could serve as an essential indicator in improving revenue collections in the company and measuring return on investment (ROI).
Reporting to Shareholders

Mostly, shareholders concentrate on revenue since it shows the capacity of a firm. Investors usually view high revenue as a good indicator.

Shareholders might be sensitised to this factor, but they do not always appear as the main focus in these reports. This is more of an internal measure to gauge operational effectiveness.

What’s the Difference Between Turnover and Profit?

Turnover and profit are both essential financial metrics. They represent distinct aspects of a company's financial performance:

Turnover Profit

Turnover is the total amount of money a business generates from its operations.

Profit, on the other hand, is what remains after deducting all expenses from the total revenue.

It reflects the company's ability to sell its products or services and generate income.

It reflects the actual financial gain or loss made by the company.

Turnover usually appears at the top of the income statement.

Profit is a bottom-line figure that appears at the end of the income statement.

It doesn't account for all expenses and costs incurred in running the business.

Profit can be categorised into different types, such as gross profit, operating profit, and net profit, each considering various expense categories.

Apply for a Business Loan with Kotak Mahindra Bank and enjoy the benefits of a Business Loan with quick approval and hassle-free processing. Our flexible repayment options allow you to choose tenures based on your convenience. Apply for a Business Loan today.

Also Read: How To Choose The Best Current Account for Your Business?

Turnover vs. Revenue FAQs

1.) Is turnover the same as revenue?

Revenue is usually considered gross income; turnover could be net sales minus deductions.

2.) Why are sales called as turnover?

Sales are called turnover because they signify the process of products or services "turning over" or being sold, resulting in revenue for a company.

3.) What is a good turnover rate?

A good turnover rate varies by industry and business type, but a higher turnover rate generally indicates efficient use of assets and resources.

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