To start with, sales turnover accounts for the total revenue a business generates during a given timeframe. Essentially, this ratio is genuinely useful for all types of businesses, allowing them to track sales trends through numerous measurement periods. This allows them to pinpoint significant changes in activity levels – if any. However, in general, most firms calculate the sales turnover ratio for a month or a year.
Concurrently, the revenue used for this calculation includes cash sales and credit sales alike. If the situation asks for it, you might choose to break down the measurement by geographic region, units sold, subsidiary, and so on.
It’s worth mentioning that the sales turnover ratio excludes revenue that could derive from other sources such as interest income, gains obtained through the sale of specific assets, or even the receipts from insurance claims. This metric refers exclusively to the revenue obtained through sales so that the company can have a realistic viewpoint of where it stands.
Calculating the Sales Turnover
As with most metrics, the calculating formula is pretty straightforward. Considering that you order 100 units of product and, within a month, you sell the entire inventory, this would mean that your sales turnover ratio is of 100 percent.
Nonetheless, in the case in which your 100 units of product lasts two months to sell out, then, the turnover percent would be of 50 percent. However, bear in mind that the sales turnover is relative to the inventory you’ve purchased or the one that remained in your facility.
Sales Turnover Trends
Moving on to the reasons why you should consider calculating the sales turnover on a regular basis, there are several aspects worth noting. Expressly, knowing your turnover rates allow you to better organize your inventory and order processes so that your company has a steady stream of product. In other words, you won’t have to deal with the many problems linked to over-ordering.
Concurrently, this metric is important for anticipating common revenue trends and returns that apply to your business’ activity. On a different note, as you collect valuable data from multiple years, you can pinpoint specific trends that display slow and spike periods. Obviously, this knowledge is powerful, as you can implement discount promos, for example, when the sales are low, or you could embrace a more compelling advertising campaign.
To that end, knowing when your business is likely to attain its highest level of sales gives you the power to maximize your turnover.
The ideal scenario is to have a high sales turnover. That entails that your sales are strong and that your inventory is moving, which are both beneficial points. This is, in truth, the overarching goal for the majority of business models. Nevertheless, in some individual cases, a low sales turnover rate against very high margins might work. But that doesn’t apply in all situations.
As you can see, calculating your firm’s profit is useful for comprehending your financial standing, to pinpoint whether certain strategic approaches should be updated or not.