What is a sales turnover?

An in-depth understanding of your sales performance is crucial whether you’re selling products or services in a physical location or online. 

Among other metrics that portray how much your company earns, it’s essential to assess your sales turnover. 

In the following sections, we explore in detail what sales turnover is. We’ll explain what sales turnover represents and make a distinction between this term and others, like profit.

What is sales turnover in business?

Turnover, in general, demonstrates how a business replaces company assets based on a specific period. 

For example, it could refer to collecting receivables, replacing employees (or employee turnover), or inventory management.

Sales turnover or net sales is the company’s total value of products or services sold during a selected accounting period, which in most cases is an accounting year. It represents the total sales generated during the annual sales period or the financial year.

It’s important to note that sales turnover includes only revenue accumulated from daily operations. It does not include non-operating revenue.

The sales turnover rate is an essential part of the income statement of profit and loss included in the business financial statements. 

In a short, it portrays how fast a company can sell its inventory. Naturally, the sales turnover ratio is also called the inventory turnover ratio. 

Companies that sell more products or services during a chosen period stand out with high sales turnover rates. Such businesses can transform invested inventory money into business profits.

Sales Turnover vs. Profit: What is the difference?

In essence, sales turnover and profit relate to the company’s earnings. 

However, the critical difference between the two terms is that while turnover is calculated before subtracting any significant business expenses, profit demonstrates the residual earnings after costs.

In short, profit is the amount of money a company can keep once the net sales figures have been reduced by all expenses. 

It’s worth noting that profit can take many forms. Some popular types of profits that are important for any business include gross profit, operating profit, and net profit.

How to calculate sales turnover?

Calculating sales turnover is rather simple. However, you must consider several factors and gather all the essential information to calculate accurately. 

Here’s what you’ll need.

Select a completed sales period

Select a completed sales period if you’re responsible for calculating your company’s sales turnover. 

This means that you’ll have all the necessary data collected and ready to use for an accurate sales turnover rate. 

On the contrary, choosing an active sales period means that the annual periods have not ended, and additional information remains to be gathered.

Establish the Cost Of Goods Sold (COGS)

Once you’ve determined the sales period, it’s time to calculate your items’ costs. 

To identify your COGS, it’s necessary to sum up the starting inventory costs and the additional inventory expenses. After you have a result, take out the total ending inventory. 

The number that you receive is the Cost Of Goods Sold.

Determine average inventory 

Unlike COGS, which considers the starting and extra inventory expenses, calculating the average inventory requires only the starting and ending inventory.

Take these two values and add them together. 

Once you receive a result, divide the final figure by two to uncover your average inventory.

Calculate the sales turnover ratio 

After you’ve completed the previous three steps, you can finally determine your company’s turnover ratio.

All you need to do is divide the Cost Of Goods Sold by the average inventory, or the average price of your products.

Understanding your sales turnover will enable you to determine the appropriate production levels for your business, avoiding situations of understocking or overstocking. It can also be valuable when calculating your common revenue and preventing overspending. 

Once you’ve calculated your sales turnover, you can identify your company’s profitability and amend your strategy to achieve your goals.

What is a good sales turnover rate?

One of the ways to measure your success rates as a business is to achieve a good sales turnover rate.

Although it’s essential to measure sales turnover, it’s also key to have the ability to understand what the result means.

As mentioned above, a higher sales turnover usually indicates a better-performing business. 

For instance, a company in the UK with a sales turnover rate of 3.35 is considered successful. In this case, the business has managed to sell its average inventory nearly three times and a half times during a single sales period.

How to increase sales turnover?

Most businesses strive to increase sales turnover rates, as this indicates that inventory is quickly being sold and sales are satisfactory.

The ideal scenario is to achieve a high sales turnover without compromising profit margins. While reducing margins to increase sales turnover in the short term may be effective, it’s not a long-term strategy that can produce reliable results. 

To increase your sales turnover, there are several approaches you can take:

• Invest in a high-quality marketing strategy: One of the most guaranteed ways to sell inventory and products quickly is to promote your assets heavily across different channels. These can include online and physical methods, such as social media marketing, Google Ads, in-store promotions, etc.
• Offer lower prices: As mentioned above, sacrificing margins is one option for achieving a higher sales turnover rate. This usually means adjusting your pricing and making your products or services more affordable to your target audience. 
• Provide multiple payment options: Businesses that support various options for online payments usually enjoy higher sales volumes due to the convenience they provide. A portion of shoppers who don’t complete their purchases online or in-store is due to payment inconvenience. 
• Optimise inventory management: Implementing efficient inventory management practices can also positively contribute to a higher sales turnover rate. Ideally, the aim is to have adequate stock levels of high-demand products while reducing excess inventory of slow-moving items. 

These are just a few examples of how you can increase sales turnover for your business. Based on the type of company you run, your products and services, and your overall strategy, there are myriad more options to explore.

Conclusion 

Calculating and understanding sales turnover for your business is crucial for planning your inventory and ensuring maximum results. 

This metric is a powerful indicator of your business’s performance, especially when compared to past performance. 

We hope this article will help you gain a more granular overview of sales turnover, enabling you to make informed decisions throughout your business growth journey.

Frequently Asked Questions

Why is sales turnover significant for businesses?

Sales turnover is essential for businesses as it provides information on how quickly the company sells its products and services. It’s directly tied to a company’s inventory management and demonstrates the ability to generate revenue from services or products sold during a specific time frame.

What does a low sales turnover mean for businesses?

Low sales turnover rates usually go hand in hand with low revenue and profitability, significant cash flow limitations, overstocking and excess inventory build-up, and overall – a damaged brand reputation.

What are some of the factors that influence sales turnover?

Factors that can decrease or increase sales turnover include market demand for the products or services you offer, pricing strategies, product or service quality, the effectiveness of your marketing strategy, competition, economic conditions, and others.