Many people in business use the terms turnover vs revenue interchangeably to refer to the same thing, even if they don’t always mean the same thing. This prompts the issue, “Is turnover the same as revenue?” The answer is no, yet they frequently coincide.
Employee turnover, for example, is an example of a commercial activity that does not create sales revenue.
This article contrasts turnover vs revenue, describes the fundamental distinctions, and explores the importance of distinguishing between the two.
What is Revenue?
Revenue is the money generated by a company’s usual operations. Revenue is listed first on an income statement. It is the figure that is used to calculate other crucial figures on the statement, such as gross income and net income.
Increasing revenue can assist ensure that a company earns more money than it spends. Revenue can be classified as either gross revenue or net revenue by businesses. The former denotes total sales before modifications, whereas the latter denotes total sales after adjustments such as discounts, refunds, and cost of goods sold.
Different types of revenue bring money into a business. These could fall into one of two categories:
- Operating revenue: Operating revenue is the income generated by a company’s core operations, which are the activities that provide the majority of the company’s income or serve as its principal role. Many firms define operating revenue as the selling of goods or services.
- Nonoperating revenue: Nonoperating revenue is money earned by a firm from secondary or tertiary activities that have no direct connection to the core operations. Nonoperating revenue is most commonly represented by interest from financial accounts and money from asset sales.
How to Calculate Revenue
The following are the steps for determining revenue:
#1. Determine the sources of revenue for the company.
Consider studying the company’s financial records and performing the necessary calculations to establish the sources of revenue. Try to figure out how much income comes from the company’s services or items. You can also determine how much comes from other sources.
#2. Determine how many customers the company has.
If the company sells a product, it is critical to know how many units are sold in a given time period. Similarly, if the company sells a service, it is critical to know how many clients purchased the service. This is one of the most important values in your calculations, so double-check your figures to ensure they’re exact.
#3. Calculate the average cost of services or items.
It is also critical to ascertain the average cost of the company’s service or product. For example, if you want to determine the revenue generated by a specific pair of shoes sold by the company, you use the average price of the shoe in the computation. It’s crucial to figure out the average price the company charges for its shoe-shining service if you want to know how much revenue the business makes from that service.
#4. Determine the revenue
You may compute the company’s revenue once you have the above values. You can accomplish this using the following formulas:
- Revenue = number of units sold x average price of unit
- Revenue = number of customers x average price of services
What is Turnover?
Turnover is the total of all services or products sold during a given time period. It illustrates the asset cycling period of a corporation. The turnover rate informs business leaders on the success of their resource management.
Business turnover reflects a company’s performance in terms of total sales. Turnover comprises a variety of metrics, including.
#1. Asset turnover
This examines how businesses create revenue by utilising their assets. Typically, a company will sell assets that are no longer in good condition.
#2. Inventory turnover
It is sometimes referred to as sales turnover. Inventory turnover is the rate at which a company may sell off its inventory in a certain time period.
#3. Account receivable turnover
Every business has its own operating model. Debt management is an important aspect of many businesses. Account receivable turnover examines how quickly a company recovers its obligations.
How Do You Calculate Turnover?
Depending on the type of turnover, multiple formulas are used to calculate it. So, let’s look at how to accomplish this;
#1. Calculating inventory turnover ratio
Within a certain time (month, quarter, or year), you will add the total value of your ending inventory to the starting inventory.
Then, you’ll multiply the initial inventory by the total number of purchases you made and the cost. The finishing inventory will then be subtracted from what you obtained above.
Divide the cost of goods sold by the average inventory. The total is your inventory turnover ratio.
#2. Calculating your account receivable turnover
Divide the entire value of your accounts receivable at the beginning and end of a certain fiscal period by two. The sales returns and allowances can then be added. Subtraction your entire credit amount. You now have an idea of your average accounts receivable.
Your account receivable turnover ratio is calculated by dividing your net credit by your average accounts receivable.
Revenue vs. Turnover
To help you understand how revenue vs turnover differ, here are some examples:
#1. Importance and effects on business
Revenue and turnover are critical for organisations or businesses since they measure and reflect financial year performance. Revenue is important for an organisation since it helps management determine the company’s strength, size, client base, and market share.
Furthermore, greater revenue suggests stability, demonstrates corporate confidence, and makes it easier to raise credit or obtain loans. In contrast, the turnover rate enables businesses to measure their efficiency in resource management, which can be important when planning and controlling output levels.
#2. Ratios that use them
Because revenue is vital in determining a company’s profitability, it is frequently used in ratios that assess earnings or financial success. The operational profit ratio, gross profit ratio, and net profit ratio are a few examples of ratios that involve revenue. Turnover, on the other hand, is a major component in many ratios that assess a company’s efficiency, such as debtor turnover ratio, inventory turnover ratio, and asset turnover ratio.
#3. Requirements for financial reporting
Revenue is the first line item reported on income statements since it is required by law to be recorded in financial statements. In contrast, reporting turnover is optional. Instead, a corporation might calculate this rate internally to better understand its financial statements and measure its manufacturing efficiency.
Why is it Important to Know the Difference Between Turnover vs. Revenue
It’s critical to understand the distinctions and overlaps between turnover vs revenue for three reasons:
#1. Financial reporting
Understanding and calculating revenue is critical because it helps businesses estimate their growth and sustainability. It is also a performance statistic used to compare the current fiscal year to previous periods.As a result, it is vital to identify and properly recognise all revenue coming through the organisation.
#2. Planning future business activities
Knowing the overall revenue earned for the year enables businesses to prepare for and allocate funds for the following fiscal period. Understanding turnover, on the other hand, enables businesses to control their production levels and avoid having idle inventory for extended periods of time. It also aids in resource planning and allocation to increase efficiency.
#3. Reporting to shareholders
Revenue must be reported in the income statement, which is available to shareholders. Furthermore, calculating turnover ratios and putting them in financial statements assists shareholders in better understanding them.
Examples of Revenue and Turnover
Consider these examples of revenue vs turnover to help you gain a better understanding of the concepts:
Example of revenue
The following is an example to help you understand revenue:
StarFurniture Inc. sells a chair for $100, and the cost of producing each chair is $20. The business sold 10,000 chairs, but it reported 25 defective chairs returned during the year. The business’s gross revenue for the year is $1 million ($100 multiplied by 10,000 chairs sold), while the total cost of goods sold is $200,000 (10,000 chairs sold multiplied by $20).
Because the company reported 25 chairs returned, its total value of returns is $500 (25 chairs returned multiplied by $20). This means the company’s net revenue for the year is $799,500 ($1 million minus $200,500 in returns and expenses). Determining the total earned revenue can help the company’s management see whether they achieved their goals for the year. Looking at net revenue also reveals areas in which they can improve. In this example, the business can focus on reducing manufacturing defects to help reduce expenditures and increase income.
Example of turnover
Here’s an example to guide your understanding of inventory turnover:
A manufacturing company wants to audit its productivity. Its accountants decided to look at the most recent month of operations. At the beginning of the month, the value of the inventory was $300 million. At the end of the month, it was $350 million. The cost of goods sold during this time was $200 million. Therefore, its turnover ratio for the month was 0.615. This means that the company went through 61.5% of its total inventory in a month, so it may be reasonable to predict that it should replenish inventory before the end of the second month.
Is Turnover the Same as Revenue?
No, however they frequently coincide. Businesses, for example, might increase revenue by turning over goods on a regular basis. In essence, turnover impacts company efficiency, whereas revenue affects profitability.
Why are Sales Called Turnover?
Sales and turnover are sometimes used interchangeably to signify the same thing, although they are not the same. Sales are the total value of products (goods and services) sold by a company. In comparison, turnover (sales turnover) shows how much a company sells in a specific period of time.
Is Turnover Revenue or Net Profit?
No, turnover is not the same as revenue or net profit. Turnover refers to your overall income (from sales and company burns) over a given time period, whereas net profit is the earnings a business makes after deducting expenses.
How is Turnover Calculated UK?
Simply sum together a company’s entire sales to determine its annual turnover. If the company sells products, the annual turnover is the total number of sales from those products. If the company sells services, the total amount charged for these services is the turnover.
Is Turnover Including Tax?
Turnover is the total amount of income generated from the sale of goods and services before deducting expenses and taxes. Turnover is also known as income or revenue, and it excludes business loans and any interest earned.
Is Turnover Including VAT?
Turnover is typically the top line of a company’s profit and loss statement, which begins with income. If a company is registered for VAT, its turnover will be its sales minus VAT, because the VAT part is money that the company does not earn and must pay over to HMRC.
Does Turnover Mean Profit or Loss?
Although the two are frequently confused, they are not the same! As previously stated, turnover refers to a company’s overall income over a specified time period. Profit, on the other hand, is what remains after expenses have been eliminated.
Conclusion
Finally, revenue and turnover are two critical components of a corporate financial statement. While revenue influences and assesses income from operations such as sales of products and services, turnover delves a little deeper into other sources of income such as asset sales.
The key distinction is seen in how they play out in terms of ratio measurement. These essential distinctions are critical for business managers to comprehend in order to better understand other underlying financial elements such as operational profit margin, staff turnover, cash turnover, production levels, and even financing capital.
Related Articles
- Gross Profit vs. Net Profit: Meaning, Formulas & All You Need
- Cost of Goods Sold: Definition, Formula & All You Need To Know
- Expansionary Fiscal Policy: Definition, Examples & All You Need
- Revenue vs. Profit: Differences & All You Need to Know
- How To Calculate Revenue: A Complete Guide
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