What Is Turnover?

What Is Turnover?

Let me explain turnover directly: it's the pace at which your company replaces assets within a specific period. This can mean selling off inventory, collecting on receivables, or even replacing employees. In investing, it refers to the percentage of a portfolio that's replaced over time.

Keep in mind that turnover can vary by context. In places like Europe and Asia, it often just means a company's total revenues. But wherever you are, understanding it helps you gauge how efficiently things are moving in your operations.

Why Turnover Matters

Turnover ratios tell you how quickly your business is conducting its operations, which directly measures efficiency and resource use. As a business owner or investor, you need to look at this because two major assets—accounts receivable and inventory—tie up significant cash, and you want to know how fast you're turning that cash back around.

Analysts and investors use these ratios to check if a company is managing its finances and assets properly. You can assess operations by examining various ratios, and what's considered good depends on what's being measured. For example, a low accounts receivable turnover might signal issues with collections or credit policies that you need to fix, while a high inventory turnover could mean strong sales performance.

What Is Accounts Receivable Turnover?

Accounts receivable is the total amount of unpaid customer invoices you have at any time. To calculate the turnover, divide your credit sales by the average accounts receivable— that's the average of your beginning and ending balances for the period.

This formula shows you how quickly you're collecting payments compared to your credit sales. Say your monthly credit sales are $300,000 and receivables average $50,000; your turnover is six. You want to aim high here: maximize sales, keep receivables low, and boost that turnover rate.

What Is Inventory Turnover?

Inventory turnover is straightforward: divide your cost of goods sold (COGS) by average inventory. It's like the receivable formula but focused on how fast you're moving stock.

When you sell inventory, it shifts to cost of sales as an expense. Your goal is to sell as much as possible while keeping minimal stock on hand. If COGS is $400,000 and average inventory is $100,000, your turnover is four—meaning you turned over your entire inventory four times that month. This helps investors gauge risk in funding your operations, and it's often higher in retail where speed matters.

What Is Portfolio Turnover?

In investing, turnover measures the percentage of a portfolio sold in a given period. For a mutual fund with $100 million in assets that sells $20 million in securities yearly, the turnover is 20%.

That means trades equaled one-fifth of the fund's assets. Actively managed portfolios have higher turnover, leading to more trading costs that cut into returns. If it's excessive, it might signal churning for commissions, which isn't ideal—passively managed ones trade less and are often seen as higher quality.

What Is Asset Turnover?

Asset turnover shows how effectively your company generates revenue from its assets over the year. Calculate it by dividing total sales by the average of beginning and ending assets—or just use ending assets if you prefer.

Investors compare this ratio across similar companies in the same sector to see who's performing better. It's a key metric for understanding revenue efficiency from your asset base.

Explain Like I’m 5 Years Old

Turnover is simply how fast something gets replaced. Think of employee turnover: it's how quickly workers leave and new ones come in. As a company, you usually want this low to keep things stable.

What Is the Meaning of Turnover in Business?

In business, turnover ratios cover areas like accounts receivable, inventory, assets, portfolios, and working capital. They all indicate how quickly you're replacing or cycling through these elements.

What Is Turnover in the Workplace?

Workplace turnover is the rate at which employees leave and are replaced. It's a sign of morale and comes with high costs for hiring and training replacements.

Is Turnover Your Profit?

No, profit is your total revenues minus expenses. Turnover focuses on the speed and efficiency of operations, like how fast you sell inventory or collect payments—not the money left after costs.

The Bottom Line

Turnover serves as both an accounting and investing concept. In accounting, it measures operational speed; in investing, it's the sold percentage of a portfolio. Focus on inventory and accounts receivable turnover to evaluate how efficiently your company runs—high rates often mean better management.