Lisa Borga

In everyday usage, revenue and turnover are often used interchangeably, and in some contexts, they may even have the same meaning.

However, there are also many key differences between the meaning of these two terms.

At its core, revenue refers to the total amount of money that a company makes.

In contrast, turnover refers to the number of times that a business runs through assets such as inventory, cash, or receivables.

## What Is Revenue?

Revenue is the total amount of money that a company makes both through selling its goods or services and through other activities such as investments and sales of assets.

This is a critical business metric that is used in a number of other calculations.

On the income statement, the revenue will be listed on the top line, and from here, it will be used to determine gross and net income.

Bolstering revenue is one of the primary focuses of any business as a larger revenue can help to ensure that a company earns enough to outweigh its expenses.

There are two common ways to classify gross revenue, which includes all operating and non-operating income, and net revenue, which includes adjustments such as discounts and cost of goods sold.

### How To Calculate Gross Revenue

Gross revenue can be calculated by adding together the totals of both a business’s operating revenue which is the money earned through its core activities such as the goods or services that it sells and its non-operating revenue, which is the money it earns through secondary operations such as returns on investments or the sale of scrap material.

### How To Calculate Net Revenue

In order to calculate net revenue, all additional factors that adjust the total amount of money earned, such as discounts, cost of goods sold, and returns are totaled.

This total is then subtracted from gross revenue in order to find net revenue.

## What Is Turnover?

Turnover refers to how quickly a business performs its operations.

Generally, this is calculated by measuring how quickly a company collects payments from accounts receivable or how quickly it sells merchandise.

Both of these ratios offer companies a way to assess their efficiency.

### Calculating Accounts Receivable Turnover

Accounts receivable turnover calculates how quickly payments are collected on credit sales.

Businesses want to maximize their turnover on credit sales in order to avoid money being tied up in receivables.

As a result, this is a crucial internal measure of efficiency.

In order to calculate this, the credit sales for a period are divided by the average accounts receivable.

Average accounts receivable is calculated by finding the average of the beginning and ending accounts receivable balances for an accounting period.

For example, consider a company that made \$100,000 in credit sales for a given accounting period and had an average accounts receivable balance of \$20,000.

In this case, \$100,000 divided by \$20,000 would be five. Therefore, the company had an accounts receivable turnover for the period of five.

### Calculating Inventory Turnover

Inventory turnover is similar to accounts receivable turnover in calculation and is a critical measure of efficiency for potential investors and lenders.

This is because it shows how quickly a business is able to convert its inventory into cash.

In order to calculate inventory turnover, the cost of goods sold for a period must be divided by the average inventory.

Average inventory is calculated by taking the average of the ending and beginning inventories.

As an example, consider a company with a cost of goods sold of \$2 million and an average inventory of \$200,000.

This would mean an inventory turnover rate of 10 (\$2,000,000 / 200,000).

## Turnover vs. Revenue: The Primary Differences

There are several important differences between turnover and revenue, and here are some of the most important.

• Turnover is a term that means the number of times a business goes through its assets, such as workers, inventory, and cash. Whereas revenue is the money a company generates by selling its services or goods to its customers.
• Companies are not required to report their turnover rates. They are typically calculated for internal use by the company. In contrast, all public companies must report their revenue. Revenue is reported as sales on a company’s income statement.
• Inventory turnover and accounts receivable turnover are metrics that are often used to analyze a company’s liquidity. Revenue is important as a way of judging a company’s strength, market share, size, and customer base.
• The turnover for a business can be calculated by counting the number of products it has sold in a year. Then, revenue for the year can be calculated by multiplying the number of units sold by the price of the unit.
• There are a variety of turnover ratios. Two of these are the fixed asset turnover ratio, which is calculated with the formula: Net annual sales ÷ (Gross fixed assets – Accumulated depreciation) = Fixed asset turnover ratio and inventory turnover ratio, which is calculated with the formula: Annual cost of goods sold ÷ Inventory = Inventory turnover. Turnover can affect a business’s efficiency, whereas revenue affects a business’s profitability.
• Turnover is important for managing production levels in a company in order to avoid having excess inventory, which may even become obsolete before being sold. In contrast, revenue is important in analyzing the growth as well as the sustainability of a company.

### The Difference in Meaning Between Turnover and Revenue

Turnover and revenue are often treated as if they have the same meaning, and, in many cases, they do.

As an example of this, inventory is turned over when it is sold, and when this happens, it generates revenue.

However, there are times when the term turnover is used in a way that is not associated with revenue, such as employee turnover, which is the rate at which employees leave a business and are then replaced.

## Final Thoughts

It can be difficult to understand the difference between turnover and revenue.

However, managers and business owners need to know the difference.

Understanding these concepts can help businesses to increase their efficiency and revenue.

If a business’s revenue is increasing, they know their business is improving.

Whereas analyzing turnover ratios can help businesses to see in which areas their efficiency may need to be improved.

Understanding both of these concepts is essential for properly running a business.

## Key Takeaways

• Revenue and turnover are both important ways of analyzing a company’s ability to generate earnings. However, there are important differences in what they refer to.
• Revenue refers to the total amount of money a business generates, including both core operations and other activities.
• Turnover refers to the rate at which a business runs through assets such as inventory, cash, or receivables.

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1. Harvard Business School Online "4 STEPS TO DETERMINE THE FINANCIAL HEALTH OF YOUR COMPANY" Page 1 . August 29, 2022

2. Southern Utah University "Balance Sheet Ratios" Page 1 - 2. August 29, 2022