Definition of Turnover
In accounting, the term turnover can have more than one meaning. In some countries turnover is used in place of sales. Turnover also pertains to certain financial ratios that relate a balance sheet (average) amount to an income statement amount.
Outside of accounting, turnover is used to express the rate at which a company has to replace the employees who leave the company.
Examples of Turnover in Financial Ratios
The following are a few of the most common financial ratios in which a turnover is computed:
- Inventory turnover ratio. This ratio is calculated by dividing a company’s cost of goods sold during a year by the average inventory during the same year.
- Accounts receivable turnover ratio. This ratio is computed by dividing the credit sales during a year by the average balance in accounts receivable during the same year.
- Total asset turnover rato. This ratio is computed by dividing a company’s net sales during a year by the average amount of the company’s total assets during the same year.
In the case of financial ratios, a higher turnover ratio indicates a more efficient use of the company’s assets.
