A sales turnover is the number of items or services a company sells during an accounting year or a specific timeframe. It helps businesses ensure that a company has enough inventory to complete orders on time and determine whether they need a restock.
In this article, we’ll unveil the importance of calculating sales turnover and ways to do it. We’ll also make the difference between a sales turnover and revenue clear.
Why is calculating your sales turnover important?
Estimating sales turnover for a business is crucial since it helps calculate revenues, manage inventory, and avoid unnecessary spending. After figuring out the measure, a company owner can assess the profitability of the brand and take the necessary measures to improve it. The figure also provides brands with a clear understanding of the number of items in stock and the number purchased. Having a clear picture of inventory is essential since it prevents customers from inconveniencing by waiting for weeks for the order to arrive. It can happen when a company has many orders and insufficient stock to fulfill them.
The sales turnover rate is especially useful during the holiday season when there are great promos and discounts and people rush to buy items for an attractive price. Calculating sales turnover helps business owners make sure that they have enough products for their customers. There are even more reasons to calculate your sales turnover. It enables you to:
- identify growth and success rates;
- find out new effective advertising strategies;
- calculate the number of items purchased and available;
- estimate common revenue;
- calculate returns.
Now that you know why estimate sales turnover, let’s proceed to the next section to compare sales turnover and revenue to avoid any confusion about these two terms.
Sales Turnover vs Revenue
Since people often misinterpret these terms and use them interchangeably, we need to uncover the difference. We’ll review each concept in detail so that you can identify them within your business.
Sales turnover defines the number of items customers purchase from a specific business within a given timeframe, usually a year. It unveils the effectiveness of inventory management and helps control it. With its help, company owners always keep their hands on the pulse when a brand needs to buy new inventory or sell old items. After calculating sales turnover, brands can identify the right production levels to help prevent overstock or shortage of items.
Revenue defines the amount of money a brand receives from selling its products. It allows businesses to assess their profitability, size, success, customer base, and share. After estimating the measure, company owners can decide what steps to take next: produce more products or change their strategy to win more clients.
Now that you know the difference, it’s time to uncover how to calculate the measure.
How to calculate your sales turnover?
In this section, we’ll provide you with short instructions on how to identify the measure for your company. Let’s dive in.
- Determine the sales period. If you need to calculate the indicator, identify the sales period. You should have accurate data for this timeframe to estimate the right measure. Make sure to select a completed sales period you hold full information of. Remember, getting the right figures for a running sales period is impossible. For your estimations, you can define a monthly, quarterly, or annual sales period.
- Calculate the cost of goods sold (COGS). The next step involves identifying the cost of your items. To find out COGS, you need to sum up the initial and additional inventory expenses. After you finish with this step, subtract the total number of ending inventory from it. The final figure will be the cost of goods sold.
- Identify average inventory. Determining your average inventory requires you to sum up your starting and ending inventory. After, divide the sum by two.
- Estimate sales turnover ratio. Finally, to figure out the turnover ratio, you need to divide COGS by the average inventory. The figure you will get is your sales turnover ratio.
Say there’s a company owner who wants to estimate annual sales turnover to find out how many items it’s vital to provide the necessary products to consumers in the upcoming year. Brand’s team calculated that the company had $400,000 in starting inventory, $100,000 of extra inventory expenses, and $40,000 of ending inventory. The team estimates that COGS is $460,000 (subtracting ending inventory from the sum of starting inventory and extra inventory expenses).
The next step is calculating the average inventory. They add the cost of starting inventory to the ending. It’ll be $400,000 + $40,000 = $440,000. After, divide by two. The final result will be $220,000.
Finally, they need to divide the cost of goods sold by their average inventory. It’ll be $460,000 / $220,000 = 2.09. This means that the company succeeded in selling average inventory more than two times during one year period.
Congrats, now you know what a sales turnover is and why it’s crucial. Hope that our guide will come in handy when estimating it for your company.
Last Updated: 22.03.2023