Turnover and revenue are two different concepts that involve accounting information. First, turnover represents how many times a company goes through assets, such as inventory or cash. Second, revenue is the money a company earns from consumers who purchase the business’ goods and services. They do have a connection, however, as companies can determine how much cash they go through in order to generate specific sales revenue. Financial accounting ratios are the primary tools for completing these measurements.
Accounting turnover ratios involve dividing one accounting figure by another. Inventory turnover, for example, is the result of dividing cost of goods sold by average inventory. The figure tells a company how many times it sells through its inventory balance. Selling through inventory more times in a year generally indicates a company has stable revenues, which typically lead to solid gross profit figures. Inventory turnover and revenue have this first connection in accounting information.
Sales turnover is the second direct connection between revenue and turnover information presented in accounting data. Sales turnover divides revenue by cash, with both pieces of information taken from a company’s financial statements. This accounting ratio tells a company how many times it burns through its cash balance. In general, cash is necessary to purchase inventory to sell and pay for any related expenses when running a business. Turnover and revenue typically have their closest relationship with this accounting ratio.
A company must closely watch its sales turnover ratio. If a company has stable sales revenue through multiple periods and a decreasing cash turnover ratio, this is often a bad sign. Essentially, the information indicates a company must spend more cash to generate the same revenue each period. Comparing current turnover and revenue ratios to previous periods is necessary to assess the data collected. This is typically the only way a company can know if the business is becoming more or less profitable.
Another accounting ratio may also play a role in a company’s turnover and revenue ratio. The receivable turnover ratio determines the collection period for turning accounts receivables from sales into cash. The formula divides credit sales by average account receivables. The result details how many times the company collects outstanding receivables in a period. A company with high revenue and low accounts receivable turnover will typically be cash poor after some time.
