Turnover refers to the number of times an asset must be replaced during a company's financial period, according to Investopedia. Turnover usually refers to a company's inventory or accounts receivable because turnover ratios denote how quickly a firm brings in revenue.Continue Reading
Turnover figures into several ratios used for accounting purposes. Inventory turnover ratio delineates the cost of goods sold during a year divided by the average inventory for the same period, notes AccountingCoach. The accounts receivable turnover ratio divides the sales made on credit by the average accounts receivable balance during a financial reporting period.
For example, the accounts receivable turnover ratio measures how efficiently a company uses its assets by extending credit and collecting debts. A high ratio means a firm operates on a cash sales or its collections are efficient, explains Investopedia. A low ratio indicates a company extends too much credit and does not collect on its debts. For instance, a company sends out a $1,000 order and collects the payment for the order in two weeks. The $1,000 was turned over within two weeks, allowing the company to use the money to pay for more inventory, staff salaries or overhead costs.
A company with $6 million in sales in the most recent year and $600,000 in average accounts receivable balances has an accounts receivable turnover ratio of 10. This number indicates a company's accounts receivable turned over 10 times in a year, or once every 36.5 days, according to AccountingCoach.Learn more about Accounting