While there are lots of factors that signal the health of a business, turnover is one of the important metrics you can use to find out how you’re tracking.
As a business owner, keeping an eye on business turnover can tell you how you’re performing. On top of that, you might get asked about turnover by investors, insurers, or government agencies – so it’s a good idea to know what it’s all about.
Here’s a rundown of business turnover: meaning, types, and how to manage it.
Broadly speaking, business turnover is a measure of the rate at which a business carries out its operations. This can include generating sales, selling inventory, or using assets.
One of the most commonly used meanings of turnover is total sales made by a business over a certain period. For example, the annual turnover is the total income made by a business over a year.
Different types of turnover can tell you different things, as we’ll explore in more detail below.
Like metrics such as profitability and cash flow, business turnover can give you a good picture of how well your business is performing.
By looking at turnover for a specific period (such as a month, quarter or year), you can compare against previous periods and see if you’re meeting your targets.
Depending on the type of business turnover you’re analysing, you can find out things like:
Investors and lenders also often ask about turnover, so you’ll want to stay on top of it if you’re looking for external financing.
Some of the most common types of business turnover include:
This is generally what most people think of as ‘business turnover’ – yearly income generated from sales. It’s sometimes also called ‘gross revenue’ or ‘total sales’.
Annual turnover gives you an overview of how much money you’re bringing in from selling your goods or services.
It’s also useful to compare annual turnover against other metrics. For instance, if your net profit is low in comparison to your annual turnover, it could signal you should lower your Cost of Goods Sold (COGS) or other business expenses. Or, if your annual turnover is healthy but your cash reserves are low, you might need to find ways to improve your cash flow.
Check out our guide to annual turnover for a more detailed explainer.
Asset turnover measures how efficiently a business uses its assets to generate sales.
Equipment and other assets are generally a large capital expense for businesses, which is why it’s important to make sure they’re being used to their full capacity. Asset turnover can help you figure that out.
A high asset turnover ratio signals that a business is using its assets well. A low asset turnover ratio indicates that assets aren’t being used as efficiently as possible due to factors such as inefficient production procedures or poor inventory management.
Our guide to asset turnover can help you discover the ins and outs of this topic.
Inventory turnover is a measure of how often inventory is sold, used, or replaced, within a particular period. It can tell you whether you’re purchasing enough (or too much) inventory, and which product lines could be underperforming.
A low inventory turnover rate can signal poor sales and excess inventory, which can lead to high storage costs and wastage. A high inventory turnover rate can be a sign of a healthy sales pipeline, or it could signal understocking or supply issues.
You can find out more about inventory turnover and how to calculate it in our small business guide. Learn more about how to calculate weeks on hand inventory.
Accounts receivable turnover is a metric that evaluates how long it takes a business, on average, to collect outstanding debt.
A high accounts receivable turnover rate is usually ideal because it shows that a business is managing its invoicing process and cash flow efficiently.
Employee turnover measures how many employees have left your business over a period, as a percentage of your total workforce. This includes voluntary resignations as well as employees being asked to leave.
High employee turnover is often linked with low productivity and can impact your business’s performance, which is why it’s important to understand.
You can learn more about employee turnover and how to calculate it in our guide.
Staying on top of your turnover is an essential part of managing your finances and making sure your business is on track.
With cloud accounting software like QuickBooks Online, you can review real-time information about your annual turnover, inventory turnover, assets, accounts receivable, and other key metrics in one smart dashboard. No more manual calculations or messy spreadsheets.
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