It is not uncommon to see entrepreneurs use the terms “turnover” and “revenue” interchangeably.
Well, while there is no rule against the use of the two terms synonymously, it is imperative for every business owner to know the clear differences between them.
What is turnover?
Turnover refers to the summation of the sale of services or products within a period. It explains the revolving period of a company’s assets. The turnover rate shows business owners the level of their resources management effectiveness.
Business turnover reveals the performance level of a business in terms of total sales. Turnover includes varying measures including.
Asset turnover
This takes a look into how businesses generate revenue by using their assets. Most times, a business sells its assets that are no longer in their best shape.
Inventory turnover
It is also known as sales turnover. Inventory turnover measures the rate at which businesses are able to sell off their inventory within a specific period.
Account receivable turnover
Every business has its model of operations. Dealing with debt is one of the components of many businesses. Account receivable turnover looks into the rate at which a business recovers its debts.
Now, you have learned about turnover and its measures. So, it is time to take a look at revenue.
What is revenue?
Revenue is an important component of every business income statement. It refers to the amount a business generates through the sales of its goods and services. Businesses record revenue so as to know the income generated.
Revenue serves as the basis for the calculations of other important financial realities of a business including gross profit, net profit, taxes, and market share, in a business financial reporting.
When businesses report revenue, they look at it from two possible angles, which are;
Operating revenue
This is the revenue generated through the operational activities of a business. When a business gets its products or service into the hands of the consumer, it generates income, which is also considered sales income. Basically, operating revenue is the total value of goods or services sold.
Non-operating revenue
A company earns revenue through other means aside from its main operations. A company can improve its income statements through the sales of fixed assets. Non-operating revenue can also be generated from interest on financial accounts receivable.
Turnover vs Revenue
The two terms have great importance for every business. They are the indicators of a business’s financial performance within a financial period. They also help to measure a company’s profitability.
However, they do this slightly differently. Revenue, on the one hand, helps the management of an organization come to the knowledge of its strength, market share, total sales, size, and customer reach.
Additionally, revenue helps to express business confidence in terms of investment capital search. It is proof that a business is selling goods.
On the other hand, turnover rate gives companies the metrics they need to measure how effective they have been in the management of their resources. These metrics help them to control their production efficiency and generate income.
As a result of the importance of turnover and revenue, they are often used with ratios that help to measure a company’s financial performance or business activities.
Revenue helps with the operating profit ratio, net profit ratio, and gross profit ratio.
The ratios that are used to indicate the efficiency of business activities are in relation to turnover and they include inventory turnover ratio, debt turnover ration, and asset turnover ratio.
How do you calculate turnover?
There are different formulas for calculating turnover based on its type. So, let’s take a look at how to do this;
Calculating inventory turnover ratio
You will add the total value of your ending inventory with the starting inventory within a given period (which may be a month, quarter, or year).
Then, you will add the starting inventory with the total amount of purchases you received and the cost. You will then subtract the ending inventory from what you got above.
Use the average inventory to divide the cost of goods sold. The sum you get is your inventory turnover ratio.
Calculating your account receivable turnover
Sum together the total values of your account receivable at the start and end of a specific financial period and divide them by two. Then, you can add the sales returns and allowances. Subtract your total credit sum. Now you have your average accounts receivable.
Divide your net credit by your average accounts receivable and you get your account receivable turnover ratio.
How do you calculate revenue?
To calculate revenue, you need to put some reports in place.
Identify your revenue sources
You do this by reviewing your financial statements. Check out the amount that comes through sales of goods and services and from other sources.
Review the business customer figure
The company sold goods or services no doubt. So, you need to know the figure of customers who purchased your goods and services. You need the sum in your calculation.
Your average product/service price
The price of your products and services is also needed to do your revenue calculations. Know the exact rate you charge for your service or product.
When you have all of these above, use the formula below:
- R= NU x APU
(NU: Number of Units sold, APU: Average price of the unit) - R = NC x APS
(NC = Number of customers x Average price of service)
Conclusion
In conclusion, revenue and turnover are two important elements of a business financial statement. While revenue affects and measures the income from operations such as sales of goods and services, turnover looks a bit further into other means of earnings such as selling assets.
The clear key differences are found in how they play out in the aspect of ratio measurement. It is important for business owners to know these key differences in order to better understand other underlying financial factors such as operating profit margin, employee turnover, cash turnover, production levels, and even raising capital.
FAQ
Is turnover revenue or net profit?
No, turnover is not revenue or net profit. Turnover refers to your total income (from sales and company burns) within a period of time while net profit refers to the earnings a business has after the deduction of expenses.
Is turnover before or after profit?
Turnover is before profits because expenses have not been deducted.