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If you are thinking of starting up a business, there are a few important terms for you in your business’s day-to-day running. This article will inform you about turnover and revenue in business, highlighting the differences and similarities between the two terms as used in business.
What is Turnover in Business?
Turnover is an accounting term used to calculate the rate at which the business collects cash from its account receivables. It is how fast the business sells its inventory. There are different types of turnover, and they are calculated differently.
Cash turnover = Net sales / cash
Inventory turnover = Cost of goods sold / Average inventory
Labor turnover – This is a measure of employee retention of a business. It is a ratio of the number of employees who leave a business, either through dismissal, resignation, or attrition, to the total number of employees on the business payroll.
Turnover can also be termed as either operational, which refers to sales proceeds from the business’s primary operating activities, or non-operational turnover, which refers to proceeds from non-primary sources such as the sale of fixed assets or earnings from current investments.
How to Calculate Turnover in Business?
If you have a culture of keeping accurate records for your business, calculating turnover should be a straightforward task. One thing you need to keep in mind is that turnover is to be calculated over a specific period of time, say, a month, or a tax year. Here is an example,
If your total sales figure for February 2021 is €50,000, then,
Turnover = €50,000
Cost of goods/services sold: €20,000
Gross Profit: $50,000 – €20,000 = €30,000
Operating Expenses: €15,000
Net Profit: €30,000 – €15,000 = €15,000
Knowing your business turnover figure is essential to you as a business owner to help you work out what you need to bring in or the steps you need to take to meet your target. A low gross profit in comparison to turnover means that you need to find ways to reduce the cost of sales. For instance, you might need to renegotiate your contracts with suppliers. With a low figure of the net profit compared to your turnover figure, you need to run your business more efficiently, for instance, trying to save on administrational costs or claiming more allowable expenses.
What is Revenue in Business?
Revenue is the income that your business will generate by conducting business activities. It is calculated by multiplying the selling price of the products sold by the business over a given period of time by the number of pieces of the products sold by the company. Any sales returns of the product are deducted to come up with a final figure of revenue. There are two types of revenue.
Operating revenue: This is the income generated from the primary activities of the business. Operating revenue comes from direct sales of goods and services offered by the business.
Non-operating revenue: this is revenue generated from sources that are different from the primary activities of the business. This can be from selling investments, assets, property, and currency exchange.
Turnover vs. Revenue
Revenue and turnover are two terms with so much correlation, and understanding the difference between them may seem complex and complicated. However, it is essential to understand these two terms for better working and survival of your business. Here is a list of differences between the two.
- Revenue reflects on the strength of the customer base of the business and its market share. Revenue growth indicates business stability and can help in securing bank loans. Banks analyze the revenue of a business as a factor to consider before passing the loan. Turnover is used only by the business owner to manage production in terms of availability and resource utilization.
- While a business can decide not to record turnover, it is mandatory for the business to record revenue in the first line of the income statement.
- Revenue directly affects the business’s profitability, while turnover only affects the efficiency in running the business.
- The business revenue figure can be used to calculate other important ratios such as gross profit ratio, net profit ratio, and operating ratio. Turnover figures can only be used to calculate turnover ratios such as fixed assets turnover ratio, inventory turnover ratio, and account receivables turnover ratio.
- Revenue comes in two forms, as earlier explained in this article. Revenue can be operating revenue or non-operating revenue. On the other hand, turnover comes in three forms, cash turnover, inventory turnover, and labor turnover.
- Revenue and turnover are two mathematical parameters that are calculated differently. Revenue is calculated by multiplying the number of products sold by the business with the selling price, fewer sales returns. Cash turnover is calculated by dividing net sales by cash while inventory turnover is calculated by dividing the cost of goods sold by the average inventory.
- Revenue is income earned by a business from conducting its primary business activities of selling goods and services to customers, while turnover is an accounting term that is used to calculate the rate of cash collection by a business from its account receivables. Turnover indicates how quickly the company sells its inventory.
There is so much similarity between turnover and revenue, but the two terms are not the same. While turnover is the total income generated by your business over a given period of time, revenue is the total value you get after summing up all the goods and services sold by your business. Turnover and revenue are very different terms in a business setting, as this article has highlighted. The article has given definitions, as well as highlighted the differences. Understanding these two business terms will help you determine the growth and sustainability of your business and manage production levels in your business.