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ProfitWell MetricsAre you using turnover and revenue interchangeably? Learn the key differences between turnover vs revenue and why they are each important for your business.
In business, many people use the terms turnover and revenue interchangeably to refer to the same thing, although they mean the same thing in some contexts. This begs the question, "is turnover the same as revenue?"
The answer is no, but they do often correlate. For example, businesses can earn more revenue by turning over their inventory frequently. Assets and inventory turnover occur after flowing through the business, either through sales or outliving their useful life. On the other hand, if the assets turning over generate sales income, they bring in revenue. However, turnover could also refer to business activities that do not generate sales income, such as employee turnover.
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This article compares turnover vs. revenue, explains five key differences, and discusses the essence of differentiating between the two.
Turnover vs revenue: 5 key differences
Revenue refers to the money companies earn by selling products or services for a price, whereas turnover is the number of times companies make or burn through assets. In reality, turnover affects the efficiency of companies, while revenue affects profitability.
1. Definitions and meaning
The first difference is in the definition and meaning of the two terms as explained below:
- Turnover: It's the number of times a business or company burns through assets such as inventory, cash, and employees (workers). Turnover determines the effectiveness and efficiency of enterprises to manage resources and allows businesses to track their cycle of purchases, sales, and inventory re-orders.
- Revenue: It represents the amount of money a business or company makes by selling products or services. For non-profit making companies, revenue is the donations, subscriptions, and membership fees. Proceeds from non-operating activities also count as revenue—for example, interest, commission, or dividends received or sale of investments, fixed assets, and scrap material.
2. Importance and effect on business
Both turnover and revenue are vital for companies and organizations because they measure and indicate performance for the financial year.
- Turnover rate allows businesses to determine their efficiency in managing company resources, which comes in handy when planning and controlling production levels.
- Revenue is critical for a company because it helps management understand the strength of the business, its size, the customer base, and market share. In addition, increased revenues indicate stability, showcase business confidence, and make it easier to raise capital on credit or get loans.
3. Main types of turnover and revenue
There are three types of turnover and two forms of revenue as explained below:
Types of turnover:
- Inventory turnover: It's a financial ratio that shows how many times a company or business has sold and replaced its inventory during a given period, say one year.
- Cash turnover: It's the number of times a company or business has spent its cash within the reporting period.
- Labor turnover: The ratio of employees who left the company to those still on the payroll in a given period. Employees can leave due to attrition, resignation, or dismissal.
Forms of revenue:
- Operating revenue: It's the revenue a company or organization earns from regular business activities.
- Non-operating revenue: It's additional revenue a company earns through other activities such as dividends or rent.
4. Formulas for calculating turnover and revenue
Businesses must calculate their turnover ratios and revenue during every financial year to ascertain their financial health.
How to calculate turnover rate:
- Cash turnover = Net sales/Cash
- Fixed asset turnover = Fixed assets/Net fixed assets
- Total asset turnover = Net sales/Average total sales
How to calculate total revenue:
- Total revenue = Total sales - returns
5. Reporting turnover and revenue
Businesses record both turnover and revenue in their financial statements. However, it is not compulsory to report turnover.
- Recording turnover on your financial statements: It is not compulsory to report turnover. Instead, a business can calculate the ratios to determine its production efficiency and better understand the financial statements.
- Recording revenue on your financial statements: Companies must record revenue in their financial statements. It's the first line item reported on the income statement.
Why is it important to know the difference between turnover vs. revenue
It's essential to know the difference and overlaps between turnover and revenue because of the following three reasons:
1. Financial reporting
It is essential to understand and calculate revenue since it helps companies determine their growth and sustainability. It's also a performance metric for comparing the current financial year with previous periods. Therefore, it's critical to track all revenue flowing through the company and recognize it correctly.
2. Planning future business activities
Knowing the total revenue earned for the year allows companies to plan for and allocate money for the next financial period. On the other hand, understanding turnover enables enterprises to manage their production levels and ensure no idle inventory for extended periods. It also helps in planning for and assigning resources to improve efficiency.
3. Reporting to shareholders
Companies must report their revenues in the income statement, which is accessible to shareholders. Furthermore, calculating turnover ratios and including them in the financial statements helps shareholders understand them better.
Revenue is the money companies earn by selling their products and services, while turnover refers to the number of times businesses make assets or burn through them. Thus, revenue affects a company's profitability, while turnover affects its efficiency. The other differences are the effect of the two on business, the types of turnover and revenue, the calculation formulas, and reporting.
The differences between turnover and revenue are many and complex, but essential for organizations to survive. All companies strive to increase and maximize their revenues, and comparing their performance year on year helps determine growth and improvement.
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Turnover vs revenue FAQs
Is turnover the same as revenue?
No, but they do often correlate. For example, businesses can earn more revenue by turning over their inventory frequently. In essence, turnover affects the efficiency of companies while revenue affects profitability.
Why are sales called turnover?
Sales and turnover are sometimes used interchangeably to mean the same thing but are slightly different. Sales are the total value of products (goods and services) a business sells. In contrast, turnover (sales turnover) measures how much the company sold its products and services within a given period.
What is the formula for turnover?
Businesses use several turnover ratios, including:
- Cash turnover = Net sales/Cash
- Fixed asset turnover = Fixed assets/Net fixed assets
- Total asset turnover = Net sales/Average total sales
What is a good turnover rate?
A good turnover ratio for:
- Inventory is between five and ten for most industries, meaning that a business sells and restocks every one to two months.
- Cash: There is no ideal figure, but most businesses prefer a ratio between 0.5% to 1%.
- Employee: It's ten percent, but most companies fall between 12% and 20%.
