Turnover

What is Turnover in Business?

In business, “turnover” primarily refers to the total revenue generated by a company from its core business activities, such as sales of goods and services, over a specific period. High turnover is a positive sign for a business, as it indicates strong sales and demand for its products or services.

Unlike profit, which deducts expenses from revenue, turnover only accounts for the total income before expenses are subtracted. For example, a store that sold $1 million worth of products in a year would have a turnover of $1 million, regardless of how much it spent on purchasing and operating costs.

Turnover is essential for understanding a business’s financial health and performance. It helps a company assess its sales and marketing strategies, set financial targets, and make informed decisions about resource allocation and operational improvements. By tracking turnover, businesses can gauge their market presence, customer health, and revenue growth potential.

Synonyms

  • Gross income
  • Gross revenue
  • Sales turnover
  • Income (in some contexts)

Understanding Turnover

Turnover vs. Revenue vs. Profit

Turnover, often used interchangeably with revenue or gross income, represents the total income generated from a company’s core business operations, including the sales of goods and services, over a specified period.

The only time turnover is different from revenue is when a company has multiple revenue streams, such as from investments or interest income. In such cases, turnover would only include the primary sources of revenue.

Profit is the amount of money that remains after all expenses are subtracted from turnover. It reflects the company’s actual financial health and ability to generate surplus income. If profits are low (or nonexistent), you won’t be able to grow your business no matter how high your turnover is.

To help you understand the differences between these terms, here’s a table that breaks down their distinctions:

TermDefinitionFormulaExample Calculation
TurnoverTotal income from sales of goods and servicesSales – Discounts – Returns – VAT$1,000 (from selling 100 units at $10 each)
RevenueTotal income from all sourcesTurnover + Other Income$1,100 ($1,000 sales + $100 interest)
ProfitRemaining income after all expenses are deductedTurnover – COGS – Operating Expenses$300 ($1,000 – $400 COGS – $300 other expenses)

Why Track Turnover?

While it doesn’t say anything about profitability, it’s still a crucial indicator of financial performance and growth potential.

By looking at your overall business income, you can…

  • Validate products, sales and marketing strategies, and business models
  • Understand customer demand for your products or services
  • Pinpoint sales trends, seasonality, and periods of slow business
  • Track the effectiveness of pricing strategies, discounts, and promotions
  • Identify and capitalize on opportunities for growth and expansion
  • Make decisions about hiring, inventory management, and marketing budgets based on expected revenue
  • Benchmark against competitors and industry standards
  • Visualize and communicate sales growth (or decline)

If you have a high monthly or annual turnover rate, that doesn’t necessarily mean you have a profitable business. But it does mean that you’ve likely achieved product-market fit — your product meets the needs of your target buyer and you’re targeting them effectively.

How to Calculate Turnover (Gross Income)

Turnover is calculated as the sum of all sales minus any discounts, returns, and value-added tax (VAT).

The formula is as follows:

Turnover = Sales Revenue – Discounts – Returns – VAT

Let’s say your company sells 10,000 units of a product at $20 each. The total sales revenue before adjustment is $200,000. You also offer a 10% discount on all orders over $100, which comprises $50,000 of your total orders. And you end up refunding $5,000 due to returns. Your VAT rate is 20%. 

Using the formula above, your turnover would be:

Turnover = ($200,000  – ($50,000 * 0.1)) – $5,000 – ($200,000 * 0.2) = $150,000

In this example, your company’s turnover is $150,000.

Turnover and Cash Flow

While turnover reflects the total income generated from sales of goods and services, it does not guarantee immediate cash flow. Cash flow represents the actual movement of money into and out of a business, which is crucial for maintaining liquidity and meeting short-term obligations (e.g., payroll, rent, inventory purchases).

For example, a business with high turnover but slower collections (i.e., longer payment terms) may struggle with short-term cash flow issues. Similarly, a business with low turnover but quick collections will probably have strong cash flow but face challenges with long-term growth and profitability.

It’s also worth mentioning that cash flow is the net amount of cash being transferred into and out of a business. It includes operating cash flow (from primary business activities), investing cash flow (from investments), and financing cash flow (from financing activities).

Using Turnover in Business Decisions

Analyzing turnover helps organizations make data-driven decisions that lead to growth and profitability.

Some practical use cases include:

Adjusting pricing strategies

By analyzing turnover, businesses can determine whether their current pricing strategy is generating enough revenue or if adjustments are needed. For instance, if your turnover is low but your profit margin is high, it may be time to consider increasing your prices.

Identifying areas for cost-cutting

Turnover also helps identify areas where businesses can reduce costs and improve efficiency. If your turnover is consistently lower than expected, look at where you’re spending money and see if there are opportunities to cut back without impacting sales.

Assessing marketing campaigns

Turnover can be used to evaluate the success of marketing campaigns by comparing sales during the campaign to previous periods or against other campaigns. This helps businesses determine which marketing efforts are most effective and allocate resources accordingly.

Forecasting future revenue

By tracking turnover over time, you can use turnover to identify trends in your sales cycle (e.g., seasonality) and predict future revenue. This is particularly helpful for making decisions about hiring, inventory management, and budget allocation.

Setting targets for the sales team

Setting sales targets based on expected turnover helps you (a) establish goals for increasing turnover and (b) provide a benchmark of what’s reasonably achievable. If your sales turnover for one quarter was $X, you could set a target of $X + 10% with a plan to boost sales.

Communicating with investors (or potential investors)

Investors still want to see a solid turnover rate because…

  • It demonstrates your product is validated (customers actually want to buy it).
  • It shows consistent sales and potential for growth.
  • They can use it as a comparison point against other companies in your industry or market.

Investors are also interested in seeing past growth, which you can measure by comparing turnover from different periods (e.g., quarter to quarter or year over year). If you can demonstrate a rise in turnover as you improve your product, marketing, and sales execution, you’ll have a compelling story about what the future of your company looks like.

Other Types of Turnover

While sales turnover is the most commonly used metric, there are other types of turnover your business should track to get a more comprehensive picture of its overall health.

High sales revenue (with profitable margins) is a good indicator. But it doesn’t speak to your ability to extend credit, collect debts, generate revenue from non-core sources, retain your employees, or move items off the shelves/out of the warehouse (if you’re selling physical products).

Inventory Turnover

Inventory turnover measures how often a company sells and replaces its inventory over a specific period. It’s calculated by dividing the cost of goods sold (COGS) by the average inventory during that period.

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory

Where:

Average Inventory = (Beginning Inventory + Ending Inventory) / # Months in the Period

If your company’s COGS is $500,000 and your average inventory is $100,000, your inventory turnover ratio would be 5. This means you’re selling and replacing your inventory five times a year.

A high inventory turnover indicates efficient inventory management and strong sales performance. Low inventory turnover can indicate overstocking, slow-moving inventory, or weak sales, potentially leading to higher holding costs and obsolete inventory.

SKU rationalization, better inventory forecasting, and implementing lean inventory practices are all solutions to low inventory turnover.

Employee Turnover

Employee turnover, also known as staff turnover or labor turnover, refers to the rate at which employees leave an organization and are replaced by new hires.

Employee Turnover Rate = Employees Who Left / Average # of Employees

Low employee turnover is a sign your team is happy and motivated. It’s also a sign that your sales process is functioning well and your leaders are well-liked. High turnover is incredibly costly, since replacing employees is expensive and time-consuming. Plus, your remaining team members may become demotivated or overworked if they see high turnover among their peers.

Offering competitive salaries, providing career development opportunities, prioritizing work-life balance for your team members, and fostering a positive work environment reduce employee turnover.

Asset Turnover

Asset turnover measures how efficiently a company uses its assets to generate sales. You can calculate your asset turnover ratio by dividing net sales by average total assets.

Asset Turnover = Net Sales / Average Total Assets

Where:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / # Months in the Period

A high asset turnover ratio means a company is generating strong sales relative to its assets. A low ratio can indicate poor asset management or underutilized assets. It helps investors and financial management teams understand how well a company is utilizing its assets in comparison to its peers.

Accounts Receivable Turnover

Accounts receivable (AR) turnover measures how effectively a company collects revenue from its credit sales. You can calculate your accounts receivable turnover ratio by dividing net credit sales by the average accounts receivable during the period.

Accounts Receivable Turnover = Net Sales / Average Accounts Receivable

Where:

Net Sales = Credit Sales – Returns – Allowances

And:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / # Months in the Period

A high AR turnover ratio indicates that a company is efficient in collecting its receivables and has a shorter collection period, improving cash flow. Streamlining dunning and accounts receivable collections is key to increasing this ratio.

People Also Ask

What is an example of turnover?

Here’s an example of turnover in business: A company does $300,000 in sales Q1, $400,000 in Q2, $550,000 in Q3, and $350,000 in Q4. Its annual turnover is $1,600,000.

Is a higher turnover always better?

While a high turnover ratio generally indicates efficient operations, strong sales, and effective inventory management, it is not always inherently better.

High turnover might suggest that products are being sold quickly, but it doesn’t necessarily mean the business is making a profit. If profit margins are low or nonexistent, the company is generating high sales volume without having anything left over to run the business.

For SaaS companies, rapid growth can lead to operational challenges, like a lack of customer service or technical support and development resources to maintain it. If a software company can’t scale internally as quickly as it’s selling, it might face high churn rates and lower customer satisfaction.

What are some limitations of using turnover?

Turnover measures sales volume but does not account for the costs associated with generating those sales. A company might have high turnover but operate at a net loss if operating expenses, COGS, and other costs are high.

High turnover might be achieved at the expense of product quality or customer satisfaction. For instance, pushing products quickly to increase turnover can lead to higher return rates or dissatisfied customers, impacting the long-term reputation and sustainability of the business.

It’s also worth mentioning high turnover does not guarantee positive cash flow. If receivables are not collected promptly, a company can face liquidity issues despite strong sales.