What Role Does Turnover Play in My Business’s Success?

Is your business truly thriving, or are you just getting by? Are you generating enough revenue to sustain and grow, or do you need to rethink your strategy?

Turnover is a key financial metric that can help you answer these questions.

Monitoring your turnover not only helps you understand your company’s overall financial health but also demonstrates your true value and potential to investors, enabling your business to grow and succeed even further.

Now, let’s dive deeper into turnover and why it’s so important for your business.

What is Turnover?

Annual turnover (also referred to as total sales or gross revenue) is your business’s total income over the course of one financial year. It’s the amount of money your company has made from selling products or services.

Turnover is not the same thing as profit. While turnover measures your total income, profit is a measure of your income minus expenses. By analyzing both together, you get a clearer picture of your company’s overall efficiency.

It’s important to note that in the world of business, the word “turnover” can also refer to several other measurements of efficiency, such as:

• Asset turnover, which measures how well your company is using its equipment and other assets to contribute to sales.
• Inventory turnover, which measures how quickly your business is going through its inventory throughout the year.
• Accounts receivable turnover, which measures how long your business takes to collect on its debts.
• Employee turnover, which measures how many employees leave your company over the course of a year.

While these metrics provide valuable insights into your business’s efficiency, we will focus solely on annual turnover in this guide. This will give you a clearer view of your financial performance and set the stage for strategic decision-making.

Where can Turnover be Found on Financial Statements?

Turnover can easily be found on your income statement, also known as the profit and loss (P&L) statement. It provides a snapshot of your company’s financial performance over a given period, typically a month, quarter or year.

Turnover is usually at the top of the statement and may be listed as “gross revenue” or “total sales.” It represents the total amount of income your business generates before any expenses are deducted.

How is Turnover Calculated?

In most cases, turnover is clearly listed on your financial statements. But if you need to calculate it yourself, it’s simple: just add up the total sales for the year. 

For instance, let’s say your company sells software subscriptions. Each yearly subscription is $1,000, and you’ve sold 1,500 subscriptions over the course of the year.

To find your turnover, you’d do the following calculation:

1,500 subscriptions x $1,000 = $1,500,000

This calculation is straightforward, but for many businesses, the process can be more complex. Chances are, your business sells more than one product or service. If your software company sells multiple products and subscription types, you’ll need to take all revenue streams into account to get an accurate turnover figure.

Fortunately, online bookkeeping software makes calculating your turnover a breeze and allows you to access accurate and up-to-date figures whenever you need them. Outsourcing your bookkeeping is another option to help your company’s finances stay organized.

Why is Turnover Important?

Annual turnover is a key measure of how much money your business generates from selling goods or services each year. It helps determine whether the company is successfully generating revenue, and whether your operations are sustainable or not.

Turnover can also help you with several other things:

Measures Your Business Performance

Every business owner wants to know if their company is performing well. A high turnover is a good indication that there’s a strong demand for your products and services, while a low turnover may be an indication that you need to refine your pricing or marketing strategies.

Guides Profitable Decisions

As mentioned previously, turnover is not the same thing as profitability. However, comparing your turnover with expenses and profit margins can help you make well-informed and cost-efficient decisions.

Shows Investors the Value of Your Business

If your business seeks a cash injection, most financial institutions and investors will analyze your turnover trends to assess your overall stability and growth potential.

Guides Your Strategic Decision-Making

What should you do differently moving forward? Turnover can help you adjust your pricing strategies, make marketing decisions, and increase the efficiency of your operations. Use your turnover insights to make smarter, more data-driven choices for the future!

What is a Good Turnover?

In general, a high turnover is a great sign: it indicates that your business is making strong, efficient sales. You’re likely managing your inventory well, pricing products competitively and collecting payments from customers on time.

A low turnover, on the other hand, indicates that something isn’t quite working as it should and it needs to be changed. Perhaps sales are slow, products aren’t priced quite right, or inventory isn’t being managed efficiently.

However, it is difficult to say what a “good” or a “bad” turnover is just by looking at the number itself. It is highly dependent on what industry you’re in, what stage of business you’re in and the history of your company.

For instance, a new company that is currently putting a lot of its resources into research and development may have a low turnover ratio as it designs new products for the future. In a year, once the company begins selling its new products, it might have a much higher turnover.

On the contrary, an established retail business that conducts a lot of daily sales may have a much higher turnover. However, if sales are significantly down from last year and expenses are high, it could indicate that something needs to change in order to boost profitability and operations.

Ultimately, turnover is just one piece of the puzzle. You need to analyze and understand the bigger picture.

Closing Thoughts

Turnover is a crucial metric for any company that wants to assess its financial health and performance. While it may be simple to find and calculate, every business owner must understand how to use it in conjunction with other financial metrics to make informed decisions about their company’s future.

Understanding turnover is just one part of managing your company’s financial success, but it’s a very important one. At Finvisor, we’re here to provide you with the expert guidance you need to navigate this process confidently.

Our team specializes in assisting startups and small businesses just like yours. With our ongoing financial services and CFO support, you’ll have the tools to make the best data-driven financial decisions for your company.

Reach out to our team today to learn more!