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What Is Turnover?
Turnover is how quickly a company has replaced assets within a specific period. It can include selling inventory, collecting receivables, or replacing employees. It can also represent the percentage of an investment portfolio that is replaced.
Turnover might also mean something different depending on the area you're in. For instance, overall turnover is a common synonym for a company's total revenues in Europe and Asia.
Zoe Hansen / Investopedia
Understanding Turnover
Turnover ratios calculate how quickly a business conducts operations. This measures efficiency and how well it is using its resources.
Two of the largest assets owned by a business are usually accounts receivable and inventory, if any is kept. Both of these accounts require a significant cash investment, and it is important to measure how quickly a business collects cash. Turnover ratios are used by fundamental analysts and investors to assist them in determining if a company is managing its finances and assets correctly.
Common types of turnover ratios include:
Companies can better assess the efficiency of their operations by looking at a range of these ratios. Good turnover ratios can be high, mid-range, or low, depending on what a company is measuring. For instance, a low accounts receivable turnover ratio means a company's collection procedures or credit-issuing policies might need to be fixed. However, the same company might be a retailer with a high inventory turnover ratio, which can indicate strong sales.
What Is Accounts Receivable Turnover?
Accounts receivable represents the total dollar amount of unpaid customer invoices at any point in time. Assuming that credit sales are sales not immediately paid in cash, the accounts receivable turnover formula is credit sales divided by average accounts receivable. The average accounts receivable is simply the average of the beginning and ending accounts receivable balances for a particular period, such as a month or year.
The accounts receivable turnover formula tells you how quickly you collect payments compared to your credit sales. For example, if credit sales for the month total $300,000 and the account receivable balance is $50,000, then the turnover rate is six. The goal is to maximize sales, minimize the receivable balance, and generate a large turnover rate.
Accounts payable turnover (sales divided by average payables) is a short-term liquidity measure that measures the rate at which a company pays back its suppliers and vendors.
What Is Inventory Turnover?
The inventory turnover formula, which is stated as the cost of goods sold (COGS) divided by average inventory, is similar to the accounts receivable formula.
When you sell inventory, the balance is moved to the cost of sales, which is an expense account. The goal as a business owner is to maximize the amount of inventory sold while minimizing the inventory that is kept on hand. For example, if the cost of sales for the month totals $400,000 and you carry $100,000 in inventory, your turnover rate is four, which indicates that you sold your entire inventory four times that month.
Inventory turnover, also known as sales turnover, helps investors determine the level of risk that they will face if providing operating capital to a company. Retailers tend to have the highest inventory turnover. The speed can be a factor of the industry in general or indicate a well-run company.
The reciprocal of the inventory turnover ratio (1/inventory turnover) is the days' sales of inventory (DSI). This tells you how many days it takes, on average, to completely sell and replace a company's inventory.
What Is Portfolio Turnover?
Turnover is a term that is also used for investments. In this context, turnover measures the percentage of an investment portfolio that is sold in a set period.
For instance, assume a mutual fund has $100 million in assets under management, and the portfolio manager sells $20 million in securities during the year. The rate of turnover is $20 million divided by $100 million, or 20%. A 20% portfolio turnover ratio could be interpreted to mean that the value of the trades represented one-fifth of the assets in the fund. However, it might also indicate a need to investigate further and determine why the mutual fund needed to replace 20% of its holdings in one year. In some cases, the fund's manager might be "churning" the portfolio, or replacing holdings to generate commissions.
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Portfolios that are actively managed should have a higher rate of turnover, while a passively managed portfolio may have fewer trades during the year. The actively managed portfolio will generate more trading costs, which reduces the rate of return on the portfolio. Investment funds with excessive turnover are often considered to be low quality.
Asset Turnover
The asset turnover ratio measures how well a company generates revenue from its assets during the year.
Asset Turnover = Total Sales Beginning Assets + Ending Assets 2 where: Total Sales = Annual sales total Beginning Assets = Assets at start of year Ending Assets = Assets at end of year \begin{aligned} &\text{Asset Turnover} = \frac{ \text{Total Sales} }{ \frac { \text{Beginning Assets}\ +\ \text{Ending Assets} }{ 2 } } \\ &\textbf{where:}\\ &\text{Total Sales} = \text{Annual sales total} \\ &\text{Beginning Assets} = \text{Assets at start of year} \\ &\text{Ending Assets} = \text{Assets at end of year} \\ \end{aligned} Asset Turnover=2Beginning Assets + Ending AssetsTotal Saleswhere:Total Sales=Annual sales totalBeginning Assets=Assets at start of yearEnding Assets=Assets at end of year
You can also use just the assets at the end of the period instead of the average for the year to calculate the ratio. Investors use this ratio to compare similar companies in the same sector or group.
There are several different business turnover ratios used, such as accounts receivable inventory, asset, portfolio, and working capital. These turnover ratios are how quickly the company replaces them.
Workplace turnover generally refers to the rate at which employees leave and join a company. It is commonly called the employee turnover ratio and is generally an indicator of employee morale. It also is associated with the high costs of replacing exiting employees.
Profit refers to a company’s total revenues minus its expenses. Turnover is how quickly a company has sold its inventory, collected payments compared with sales, or replaced assets over a specific period. Generally speaking, turnover looks at the speed and efficiency of a company’s operations. Profit looks at how much money the company makes after expenses.
The Bottom Line
Turnover can be either an accounting concept or an investing concept. In accounting, it measures how quickly a business conducts its operations. In investing, turnover looks at what percentage of a portfolio is sold in a set period.
A business will have many types of turnover to measure, but the most common are inventory and accounts receivable. Accounts receivable turnover shows how quickly a business collects payments. Inventory turnover shows how fast a company sells its entire inventory. Investors can look at both types of turnover to assess how efficiently a company works.
Turnover, or employee turnover, refers to the percentage of employees leaving an organization and being replaced by new ones. This phenomenon has intensified in our markets in recent years, significantly impacting businesses. Predicting turnover has become a real challenge for private and public companies and can be estimated in different ways: using a simple statistical method or employing a more sophisticated method based on artificial intelligence (AI) and machine learning.
AI technology and machine learning are revolutionizing the traditional method of calculating future turnover by allowing more accurate prediction and identifying key factors contributing to turnover. This enables companies to implement more targeted and effective strategies to improve personnel management and optimize human resources.
So, how do artificial intelligence and machine learning enhance the classical statistical approach to turnover calculation?
Companies often use statistical approaches to predict their turnover rates over a given period. It’s important to note that these predictions are based on historical data. The prediction results can be used for strategic decision-making in human resources management to anticipate any resignations.
Here is a common methodology for predicting turnover rates using a statistical approach:
Using this statistical approach, companies can obtain an approximate estimate of their future turnover rate and take preventive measures to retain their talents.
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The turnover rate calculation can be significantly improved through artificial intelligence and machine learning. The algorithm is built based on the company’s industry and its history enriched by influential market data.
TOP, with these technologies, predicts it effectively and allows for the automation of these actions.
As observed in our article, traditionally, the classical method of turnover rate calculation can pose numerous obstacles despite its simplicity. Let’s see below the advantages of using an approach involving artificial intelligence and machine learning, as proposed by T.O.P.:
Artificial intelligence and machine learning lead our companies to rethink themselves. By leveraging their benefits, we can find answers to many of our challenges.
Solutions like T.O.P. demonstrate that their mobilization as support is essential today.
Rethinking turnover prediction through these technologies allows managers to enhance themselves, take a certain distance from their teams, and implement the necessary actions to retain their talents.
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