Accounting for turnover is often a useful practice in small-business management. Turnover is simplistic, but it provides a straight-forward way of assessing the efficiency of a business. Small-business owners can often gain a better picture of their business' strengths and weaknesses by learning about the turnover ratios used in accounting and management.
Basics of Turnover Accounting
In business, turnover accounting is the name given to the analysis of ratios that measure how effectively a business moves through -- turns over -- a given account in the accounting cycle. In most cases, business want to maximize turnover because they only accumulate earnings from a percentage of its sales per unit. Turnover ratios are generally measures of business efficiency and provide information about the the business' capability to deliver a return per dollar of its capital investment.
For sales and retail businesses, inventory turnover is a valuable tool for assessing management performance. To figure the inventory turnover ratio, a business divides its total cost of sales for the period by the average inventory it held during the period. In essence, this tells the business how many times it bought and sold its entire inventory in the accounting cycle, usually a year. This is critical because the business can only deliver so much revenue per inventory "turn."
Asset turnover is related to inventory turnover but gives the business a better picture of its performance based on all of its assets, rather than just the merchandise it purchases for sale. To calculate asset turnover, accountants simply divide the businesses total revenues, reported on the period's income statement, by its total assets, reported on the balance sheet. In essence, this number is the amount of revenue the company generated per dollar of its assets. Ideally, a business looks to maximize the amount of revenue it earns on each dollar of its assets, as this is likely to generate the greatest return on investment overall.
Receivables and Payables Turnover
In addition to maximizing the performance on assets, a successful business must carefully manage its credit situation and cash flow. This is where the credit turnover ratios, accounts receivable turnover and accounts payable turnover come in. Accounts receivable turnover measures the number of times during the accounting cycle that the business' entire receivables account is paid off. Payable turnover is the same number but on the liabilities side of the balance sheet -- the total purchases made on credit divided by the average payables balance. If the payables turnover ratio exceeds the receivables turnover ratio, the business may experience cash-flow challenges unless it has substantial cash sales.
- AccountingCoach Blog; What is Turnover?; Harold Averkamp
- Problems and Perspectives of Management; Accounting Turnover Ratios and Cash Conversion Cycle; Pedro Ortin-Angel and Diego Prior; 2004
- Morningstar: Asset Turnover
- SimpleStudies: Accounts Payable Turnover
- Money-Zine.com: Accounts Receivable Turnover
- Business Link UK: Use Accounting Ratios to Assess Business Performance
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