
Annual turnover is a critical financial ratio that allows an accurate portrayal of the performance of any business venture and its financial soundness. Identifying what annual turnover is, how it is worked out, and what it means is a necessary precondition for entrepreneurs and financial managers. If you are one of those, you better stay with us to the end for your strategic planning and sound decision-making.
Definition of Annual Turnover
It refers to the total amount of money, which a business generates from the operation of the business within a year. Besides, this includes all sales, services, and all other business activities that give the gross income to a company.
Importance of Understanding Turnover to Businesses
Understanding annual turnover is critical to carrying out an informed analysis of the firm’s present status in terms of its financial stability and growth potential. It acts as a yardstick against which sales performance can be measured, helps in deducing trends in business, and it forms a basis for investors or stakeholders in making financial decisions.
What is Turnover in Business?
Business turnover refers to the total value of sales transacted within a particular period. Unlike profit, which is the amount of money remaining from revenues after accounting for expenses, turnover purely signals the volume of sales. Hence, it gives an indicative view of the overall capacity of the business in generating revenues.
Explanation with Examples
For example, if a company sells 1,000 units of any product within a year at $50 each, then the annual turnover will be $50,000. So, it gives insight into the total sales volume without taking costs into account for generating such sales.
Turnover vs Revenue
Though you can use the terms almost interchangeably in many cases, there is a wide difference between turnover and revenue:
Turnover: Total sales in a given period undertaken by the business.
Revenue: This is any profit that the business earned through its sales and various other operations. The income will include dividends and interests, as well.
How to Calculate Annual Turnover
Step by Step Calculation Methods
1: Deduce Total Sales: First, collect all the sales for that period.
2: Deduct Taxes: Substract the on-tax or other fees that are not adding to the turnover.
3: Sum up All Sales: In the end, summing up of all the sales will lead to total turnover.
Annual Turnover Formula
Annual Turnover = Total Sales Revenue − Returns and Discounts
Examples
Assume that a company makes sales of $200,000 with returns of $10,000 and $5,000 discounts. The annual turnover would be:
Annual Turnover=200,000−(10,000+5,000)=185,000
Balance Sheet Annual Turnover
A balance sheet reflects the position of a company’s financial affairs. Therefore, turnover is one of the most important aspects to arrive at an understanding of the sales performance.
What is Turnover in a Balance Sheet?
Turnover in a balance sheet refers to the sales or gross revenue generated by the company during the financial year. It essentially denotes the efficiency by which a company is putting its assets into work to generate sales.
Calculating Turnover from a Balance Sheet
To ascertain the turnover from a balance sheet:
Find Sales Revenue: Find the total sales revenue in the income statement section.
Subtract Returns and Discounts: Deduct any returns or allowances.
Turnover: The adjusted sales figure would be annual turnover.
Yearly vs Annual Turnover
To appropriately report the financials, it needs to be clear as to the difference between yearly and annual turnover.
Defining the Difference
Yearly Turnover: The total sales in any 12-month period.
Annual Turnover: This typically reflects the annual fiscal period to which the company is subject.
Business Planning Consideration
Knowing this helps in setting realistic business objectives and allows business planning on the basis of a fiscal calendar.
Key Points
- Annual turnover measures total sales within one year.
- It contrasts with revenue because it encompasses only the volume of sales in its groupings.
- Accurate calculation bears significance for satisfactory financial planning.
- The Impact of Turnover to Business Growth
- Turnover directly influences business growth, as this encompasses the trend of sales, market position, and financial health.
How FastLane HR Can Help
At FastLane HR, we provide professional accounting and financial services and advice on how to manage and optimize your business turnover. To learn more about how we can help your business grow, get in touch with us today.
By understanding annual turnover and ways to manage this, you will set the stage for continued business success.