A high inventory turnover ratio indicates high sales volumes and may also indicate optimal use of inventory. It shows the efficiency at which businesses manage their inventory levels according to the number of sales. Inventory turnover, also known as stock turnover, is used to measure the rate at which businesses sell inventory, replace or sell it.

Investors and other stakeholders may consider this number low while evaluating the liquidity and creditworthiness of the company. Then, by dividing the total purchases by the average accounts receivable, their accounts payable turnover ratio is 2.43. You can calculate accounts payable turnover by dividing the total purchases by the average accounts payable.Įxample: Company ABC purchased raw materials worth ₹10,00,000 this year and their average accounts receivable is ₹4,10,000. A high accounts payable turnover ratio shows that the company pays its debts quickly and can be a good measure of its creditworthiness. In balance sheets, businesses record accounts payable under current assets. It is a liquidity ratio that measures the number of times a company repays the money that it owes over an accounting period. Accounts payable turnoverĪccounts payable turnover is used to measure the ability of a business to pay its debts to vendors. You can calculate the average accounts receivable by dividing the sum of the opening and closing accounts receivables by two. This number indicates the number of times or the efficiency with which you are able to collect the money. By dividing the net credit sales by accounts receivable, the turnover is 1.33. You can calculate accounts receivable turnover by dividing the net credit sales by the average accounts receivable.Įxample: The net credit sales of a company for a year are ₹50,00,000 and the average accounts receivable for the same period is ₹37,50,000. In balance sheets, businesses record accounts receivable under current assets. Businesses aim for high numbers as it indicates a greater ability to collect the debt. This figure refers to the time it takes businesses to manage their account receivables in a given accounting period. Here are the different types of turnovers: Accounts receivable turnoverĪccounts receivable turnover refers to the effectiveness with which a business is able to collect the debt that it extends to customers and other businesses through credit sales. Related: Revenue Vs Turnover: Meaning, Key Differences And Examples Different types of turnover in businessĪpart from accounting turnover, there are other types of turnover that explain different situations in a business. Since turnover is the net sales before any deductions, companies record them at the top of their income statements. While turnover is the total sales of a business, profit is the total money that stays with the business after deducting major expenses, such as cost of goods sold, operating expenses and taxes. Often, people confuse turnover with profit, but they are essentially the top-line revenue and the bottom-line results. It is the sum of the overall earnings of a business before you deduct any expenses. Also known as gross sales or income, it is the total amount of sales that a business generates in an accounting period. 'What is turnover?' is a common question, as there are different types of turnover in business.

Revenue turnover definition