Turnover Ratio — Microsoft Excel
In this article, we will walk you through the fantastic journey of learning turnover ratio and we also have a look, why it is so important and necessary for a company basically it shows the assets and liabilities that a company is replacing in relation to its sales. We will discussing the fundamentals of turnover ratio and it’s different types that matters for a company or business.
Turnover Ratio
This ratio shows the amount of assets or liabilities that a company is replacing in relation to its sales. Generally, a high turnover ratio is considered to be good as it shows higher turnover with minimal investment of funds. These ratios are used to analyze business efficiency in utilizing the assets.
There are five types of turnover ratios:
- Fixed assets turnover ratio
- Current assets turnover ratio
- Creditors turnover ratio/accounts receivable turnover ratio
- Debtors turnover ratio/accounts payable turnover ratio
- Inventory turnover ratio
Fixed Assets Turnover Ratio
It indicates how well a company is generating profit from its fixed assets. The fixed assets turnover ratio is calculated as a company’s net sales divided by average
fixed assets, some analysts take only the closing balance of fixed assets, but it is recommended that you take the average for better results.
Formula:
Where, net sales is the total revenue as shown in the income statement and the average fixed assets is the average of opening and closing of fixed assets.
Let’s take an example to understand this better by looking at the figure below.
The above figure, shows that the fixed assets turnover ratio is 167%.
A high fixed assets turnover ratio indicates the capability of the business to achieve maximum sales with minimum investment in fixed assets.
Current Assets Turnover Ratio
It indicates how well a company is generating profit from its current assets. The current assets turnover ratio is calculated as a company’s net sales divided by the
average current assets. Some analysts take only the closing balance of current assets,
but it is recommended that you take the average for better results.
Formula:
Where net sales is the total revenue as in the income statement and average current
assets is the average of opening and closing of current assets, inventory and sundry
debtors. The components of current assets are the same as those of current ratio. Let’s take an example to understand this better by looking at the figure below.
The above figure, shows that the current assets turnover ratio is 196%.
A high current assets turnover ratio indicates the capability of the business to achieve maximum sales with minimum investment in current assets.
Debtors Turnover Ratio/Accounts Receivable Turnover Ratio
It indicates how well a company is collecting money from its customers. The debtors turnover ratio/accounts receivable turnover ratio is calculated as a company’s net sales divided by the average debtors, average of opening and closing.
Formula:
Where, net sales is the total revenue as shown in the income statement and average
debtors is the average of opening and closing of sundry debtors.
Let’s take an example to understand this better by looking at the figure below.
The above figure, shows that the accounts receivable turnover ratio is 400%. A high debtors turnover ratio indicates that we are collecting money quickly.
This turnover ratio is used to calculate debtors’ collections period, we will learning upcoming sections.
Creditors Turnover Ratio/Accounts Payable Turnover
Ratio
It indicates how well a company is paying off its suppliers and vendors. The creditors turnover ratio/accounts receivable turnover ratio is calculated as a company’s net sales divided by the average creditors, average of opening and closing.
Formula:
Where net sales is the total revenue as shown in the income statement and average creditors is the average of opening and closing of sundry creditors. Let’s take an example to understand this better by looking at the figure below.
The above figure, shows that the accounts payable turnover ratio is 308%.
A high creditors turnover ratio indicates that we are paying suppliers and vendors
on time.
This turnover ratio is used to calculate the creditors payment period, we will learn in upcoming sections.
Inventory Turnover Ratio
It indicates how well a company is utilising its inventory timely. The inventory turnover ratio is calculated as a company’s net sales divided by its average inventory
average of opening and closing.
Formula:
Where net sales is the total revenue as in the income statement, and average inventory
is the average of opening and closing of inventory. Let’s take an example to understand this better by looking the figure below.
The above figure, shows that the inventory turnover ratio is 385%.
A high inventory turnover ratio indicates that we are utilizing our inventory well.
This ratio is widely used to analyze the financial performance of retailers and
manufacturers.
The higher the ratio, the less inventory the firm is keeping in relation to its sales.
This turnover ratio is used to calculate the inventory conversion period. We will
learn this in upcoming sections,
The inventory conversion period, debtors collection period and creditors payment period are used to determine the cash conversion cycle of working capital.
Conclusion
Finally, we will cover the fundamentals of turnover ratio and along with that we also understanding and identifying how important it is, in accounts and finance because it help us in identify the patterns of cash generation by selling different products to consumers and also define overall profit against overall sales.
