Turnover - Explained
What is Inventory Turnover?
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Table of ContentsWhat is Inventory Turnover?What is Turnover in Operations?What is the Account Receivable Turnover?What is Sales Turnover?Investment TurnoversAcademic Research for Turnover
What is Inventory Turnover?
Turnover is a calculation of how fast a firm conducts its operations. Turnover is also defined as the part of a portfolio that has been auctioned out in a given period of time. It is generally used to determine how fast a firm sells off their inventory and take money from their account receivable. A company's total revenue can also be referred to as its overall turnover, with the former being used in Asia and Europe.
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What is Turnover in Operations?
Accounts receivable and inventory are the two biggest assets which a corporate business can own. Both of them are built on the foundation of huge capital investments, and it wouldn't be a wise idea to overlook how a business handles cash collection. In calculating how a business collects cash from these two assets, fundamental analysts and investors make use of the turnover ratio; a metric which is also useful in examining the future value of an investment. Important Details about Turnovers
- Turnover refers to how fast a firm conducts their operations
- In portfolio management, turnover is the percent of an investment sold in a given period of time
- Corporate turnover focuses on the ratio of account receivables to inventory products
What is the Account Receivable Turnover?
This refers to the total amount of outstanding customer invoices at any period. This amount is usually measured in dollars. Let us assume that credit sales are not immediately paid in cash, then we can say that the account receivable turnover formula is the volume of credit sales per average account receivable, Here, the average account receivable is the median receivable balances in a given period. Account receivable turnover evaluates your payments rates compared to credit sales. The general idea of this formula is to maximize sales and reduce credit sales so as to avoid debt or to increase profit. A company with $20,000 in credit sales and $5000 in paid purchases is said to have a turnover rate of four using the average account receivable formula.
What is Sales Turnover?
Sales or inventory turnover can be calculated by dividing sales by average inventory. Also, companies can choose to use an alternative method which involves using the cost of goods sold (COGS), rather than the sales amount. The goal of this method is to help businesses make better choices on manufacturing and other operations. Each business owner desires to maximize the amount of products sold and minimize the amount of products they have in the warehouse. Thus, returns from inventory sales are moved to an expense account. Let us assume that a company's total sales for a month is $80000, and $5000 is carried into the inventory, then we can say that the turnover rate is 16, which implies that this company sells all its products sixteen time per year. Sales turnover assists investors in making decisions on the risk level of investing operation capital into a company.
Turnovers are also used in investments, where portfolios with low rate of turnovers are said to have low-quality. Let us assume that a mutual funds assets has a worth of $100 million under management, and the investment manager decides to auction off $10 million in securities during the year. The turnover rate is said to be 10%, which is the actual value of all the funds estimated at $100 million, and the value of the security auctioned out, which is $10 million. Actively-traded portfolios have a higher chance of greater turnover rates than passively-traded portfolios. This is because the former seizes more trade opportunities than the latter. However, it is important to note that actively traded portfolios have higher costs when compared to passive investments.
Academic Research for Turnover
- Outside directors and CEO turnover, Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of financial Economics, 20, 431-460.
- Organizational commitment, job satisfaction, and turnover among psychiatric technicians., Porter, L. W., Steers, R. M., Mowday, R. T., & Boulian, P. V. (1974). Organizational commitment, job satisfaction, and turnover among psychiatric technicians. Journal of applied psychology, 59(5), 603.
- Job matching and the theory of turnover, Jovanovic, B. (1979). Job matching and the theory of turnover. Journal of political economy, 87(5, Part 1), 972-990.
- Job satisfaction, organizational commitment, turnover intention, and turnover: path analyses based on metaanalytic findings, Tett, R. P., & Meyer, J. P. (1993). Job satisfaction, organizational commitment, turnover intention, and turnover: path analyses based on metaanalytic findings. Personnel psychology, 46(2), 259-293.
- Effects of human resource systems on manufacturing performance and turnover, Arthur, J. B. (1994). Effects of human resource systems on manufacturing performance and turnover. Academy of Management journal, 37(3), 670-687.
- The impact of human resource management practices on turnover, productivity, and corporate financial performance, Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of management journal, 38(3), 635-672.
- Teacher turnover and teacher shortages: An organizational analysis, Ingersoll, R. M. (2001). Teacher turnover and teacher shortages: An organizational analysis. American educational research journal, 38(3), 499-534.
- Intermediate linkages in the relationship between job satisfaction and employee turnover., Mobley, W. H. (1977). Intermediate linkages in the relationship between job satisfaction and employee turnover. Journal of applied psychology, 62(2), 237.
- Review and conceptual analysis of the employee turnover process. Mobley, W. H., Griffeth, R. W., Hand, H. H., & Meglino, B. M. (1979). Review and conceptual analysis of the employee turnover process. Psychological bulletin, 86(3), 493.
- Management turnover and financial distress, Gilson, S. C. (1989). Management turnover and financial distress. Journal of financial Economics, 25(2), 241-262.