Definition
Turnover, in finance, generally refers to the net sales generated by a business over a certain period of time. Alternatively, it can also signify the number of times an asset, such as inventory, is replaced or sold during a period. Finally, in an investment context, turnover is the rate at which a portfolio’s securities are traded.
Phonetic
The phonetic spelling of “Turnover” is: /ˈtɜːrnˌoʊvər/.
Key Takeaways
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- Economic Significance: Turnover often serves as a standard measure of a company’s overall health and performance. High or increasing turnover may indicate that a company has a strong business model and strong customer demand.
- Employee Turnover: If turnover is used in the context of HR, it refers to the number of employees that a company loses and replaces over a given period. High staff turnover can often signal problems within the organization’s culture or management.
- Turnover Rate in Investing: In the field of investing, turnover rate refers to the percentage of a portfolio that is sold in a particular month or year. A high turnover rate could mean higher transaction costs for the investor.
“`These are three important things to understand about what ‘turnover’ could represent in different contexts.
Importance
The term “turnover” in business and finance is important as it provides insight into a company’s operational efficiency and financial health. Turnover can refer to the rate at which a company’s inventory or assets are sold, replaced, or utilized in a given period. A high inventory turnover indicates robust sales or effective inventory management, suggesting that the company can sell its products quickly. Moreover, it also refers to the rate at which employees leave and are replaced, which is crucial as high turnover can point to underlying problems such as employee dissatisfaction. In finance, turnover refers to the volume of shares that are traded and can signify investor interest and market liquidity. Overall, evaluating turnover is critical for understanding a business’s efficiency, profitability, and long-term viability.
Explanation
Turnover, in financial terms, represents the totality of a company’s operations reflected through its business activity within a specific timeframe. This essential financial indicator gives insights into the company’s performance and efficiency in using its assets or resources. For a retail company, for instance, sales turnover showcases the company’s ability to sell its stock, emphasizing its effectiveness in converting its products into revenue. In a broader context, it reflects demand for a company’s products or services, being a barometer of the firm’s overall market competitiveness. More specifically, turnover is used in various business contexts. For instance, in asset management, portfolio or inventory turnover helps measure the frequency at which assets are bought or sold, reflecting the fund manager’s or company’s activity level, or the “liquidity” of their business model. In terms of human resources, employee turnover provides vital data on employee retention and satisfaction. High turnover might indicate problems in the work environment. In any context, turnover serves as an important metric to make informed decisions for business growth and sustainability.
Examples
1. Retail Store: A high-street retail store keeps track of its turnover to analyze how effectively the goods are sold. For example, if the store sold inventory worth $50,000 in January, and its costs of goods sold were $30,000, it had a turnover rate of about 1.67.2. Customer Turnover: A telecom company might look at its subscriber turnover as a measure of its performance. For instance, if the company started the year with 1 million subscribers, lost 200,000 and gained 300,000 subscribers throughout the year, its turnover rate would be 20%.3. Employee Turnover: A corporation, for instance, may monitor its employee turnover rate to gauge its workplace environment. If there were 500 employees at the beginning of the year, and across the year, 50 left the company and 50 new ones were hired, that company would have an annual employee turnover rate of 10%.
Frequently Asked Questions(FAQ)
What is turnover in financial terms?
In finance and business, turnover refers to the net sales generated by a company over a particular period, usually one year. It’s a measure of the amount of revenue a company yields over time from its operations.
How is turnover calculated?
Turnover is calculated by adding up all the sales (or revenue) a company generates in a specific period and subtracting any returns or cancellations.
Is a high turnover rate good or bad?
A high turnover generally signifies a good business performance, showing that the company has strong customer demand. However, if the turnover rate is high because of good sold at low profit margins, frequent discounting or high operating costs, it might not be a positive signal.
How does turnover affect a company’s profit?
Turnover directly influences a company’s profits because it outlines the total sales or revenues a business generates. Higher turnover usually leads to higher profits unless the cost of sales or other operating expenditures increase at a faster rate.
What is the difference between turnover and profit?
Turnover refers to the total sales generated by a business within a certain period, while profit is the amount of income that remains after all expenses, costs, and taxes accounted for.
What can cause low turnover?
Several factors can cause low turnover: weak consumer demand, strong competition causing lower sale volumes, outdated or less desirable products or services, poor marketing strategies, and economic conditions.
What does inventory turnover mean?
Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A higher ratio indicates strong sales, and conversely, a low ratio implies weak sales or high inventory levels.
What’s employee turnover?
In terms of human resources, employee turnover refers to the number or percentage of workers who leave an organization and are replaced by new employees in a certain period. High employee turnover can be costly for a company.
Is turnover the same as revenue?
Yes, in business terms, turnover is often used interchangeably with revenue. Both refer to the total amount of money generated by the sale of goods or services.
: Does turnover include VAT?
: Depending on the jurisdiction and its rules, turnover may or may not include VAT. It’s important to refer to the local tax codes and regulations in each specific case.
Related Finance Terms
- Inventory turnover
- Asset turnover
- Receivables turnover
- Employee turnover
- Stock turnover
