Turnover - What is turnover?
Turnover is how often a company must replace assets such as inventory OR it is the net amount it makes as a result of its sales
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‘Turnover’ has two different meanings depending on the context. Sales turnover involves the net sales in an accounting period. Turnover involving assets concerns how often or how fast a company must replace its assets and how it handles its liabilities.
The period of measurement for the business turnover rate is typically one year. The sales turnover is the net sales, which means the total amount of sales for the company, not including the VAT.
Turnover of assets
Turnover can also mean the rate at which a company restocks its inventory or collects on its accounts receivable.
Turnover on accounts receivable
Determining turnover on accounts receivable is used to see whether a company is collecting on money owed to it compared to how often it is issuing credit.
When a company provides credit to a customer and creates an account receivable, the speed with which it collects the money owed can have a large impact on the health of its finances.
It is therefore the goal to have a high turnover rate for accounts receivable. This indicates that a company has high sales, and issues credit but has a fast and successful history of payment collection.
For example: If a company sells £8,000 of merchandise on credit in a month, and the balance in the accounts receivable is £1,000, then the turnover rate is 8.
Turnover on inventory
The goal of a business is to sell as much of its inventory as possible. In this sense, inventory is listed as an expense. By selling the inventory, you reduce your expense and balance out your accounts.
Similar to the turnover rate for accounts receivable, it is always better to have a high turnover rate for inventory. This means that you divide the total cost of sales by the current inventory.
For example: If a company’s total sales for the month are £2,000 and the inventory remaining is worth £500, then the turnover rate is 4.
Turnover and Debitoor
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