Revenue and turnover are separate accounting concepts, but are connected. Accounting ratios, such as inventory turnover and sales turnover, can help a company determine how much money they go through to generate specific sales revenue. The receivables turnover ratio can also play a role in a company’s revenue-to-turnover ratio. It is important to compare ratios to previous periods to evaluate profitability.
Turnover and revenue are two different concepts involving accounting information. First, revenue represents the number of times a business goes through assets, such as inventory or cash. Second, revenue is the money a business makes from consumers buying the company’s goods and services. They do have a connection, however, as businesses can determine how much money they go through to generate specific sales revenue. Financial accounting reports are the primary tools for completing these measurements.
Accounting rotation ratios involve dividing one accounting figure by another. Inventory turnover, for example, is the result of dividing costs of goods sold by average inventories. The figure tells a company how often it sells through its inventory balance. Selling through inventory multiple times a year generally indicates that a company has stable revenues, which usually leads to solid gross profit numbers. Inventory turnover and revenue have this first connection in accounting information.
Sales turnover is the second direct link between revenue and the turnover information presented in your accounting data. Sales turnover divides revenue into cash, with both pieces of information taken from a company’s balance sheet. This accounting report tells a business how many times it burns through its cash balance. In general, you need cash to purchase inventory to sell and pay for any related expenses when running a business. Turnover and revenue generally have the closest relationship to this accounting ratio.
A company needs to look closely at its revenue ratio. If a company has stable sales revenues over multiple periods and a declining cash turnover ratio, this is often a bad sign. In essence, the information indicates that a company needs to spend more money to generate the same revenue each period. To evaluate the data collected, it is necessary to compare the ratio of turnover to current and previous periods. This is typically the only way a business can know if the business is becoming more or less profitable.
Another accounting ratio can also play a role in a company’s revenue-to-turnover ratio. The receivables turnover ratio determines the collection period to transform accounting receivables from sales into cash. The formula divides credit sales by the account’s average credits. The result indicates how many times the company collects outstanding receivables in a given period. A company with high revenues and low credit turnover will typically be cash poor after some time.
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