Annual Turnover- Tips and Suggestions

Running a business is not something really easy. Whatever be the type of business, one needs to maintain detailed accounts of the company to calculate the gains and losses a company has made in every quarter or in each month. Maintaining the accounts of a company is also important for calculating the annual turnover of a company or the yearly profit and loss details of a company. It helps in deciding whether a company is running in loss or making profits from its business activities. Therefore, maintaining the details in a perfect way is important to decide the future of the company.

How to Calculate Annual Turnover of your Company or Organization

It is known to every business owner that maintaining the records of the annual turnovers of their businesses is important. Yet, many new entrepreneurs, especially the small business owners do not know how to do the calculations correctly. If you are one of them, you need to take note of a few important facts related to the calculation process.

The first and foremost thing that is to be decided is the accounts of which you are making the calculations. If you are calculating the income of your company, you need to decide the gross income of the company. Net income of a company includes several deductibles. So, making the calculations based on it is never a wise job as it will not provide you with the appropriate results.

The same strategy is applicable for calculating the annual sales turnover of a company. One needs to calculate the gross sales and then determine the profit amount he has made from the business. Calculations can be done easily if one has complete documentation of all the transactions made throughout the year.

Formulae for Calculating Annual Turnover and Turnover Rate

Accountants use different formulae for calculating annual turnover rate of a company. There are separate formulae for calculating total sales turnover, total business turnover or total gains made in a financial year. If someone wants to get the financial database of his company maintained in the right way, he can surely take the assistance of an experienced accountant who is familiar with all the tips and tricks for the job. Different software has been developed for calculating the annual turnover of a company and one can also use that for calculating the complete financial records of a company to know whether the business is making profit or loss.

How to Calculate Annual Company Inventory Ratio and Annual Receivables Ratio

What is Inventory Turnover Ratio?

“Inventory Turnover Ratio” indicates how many times a company’s inventory is sold and replaced over a period. It measures the efficiency of the management, how well it manages its capital along with production and sales resources. It is a common measure of the firm’s operational efficiency in the management of its assets. A lower inventory turnover ratio may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. However, a very high value of this ratio may be accompanied by loss of sales due to inventory shortage. It is thus, a measure of the number of times that the company sold through its inventory during the year. If the inventory turnover ratio of a firm is 4, that indicates that the company sells a particular block of its inventory in every quarter and it has a three months stock or supply in hand.

Inventory Turnover Ratio can be calculated by the following formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Inventory turnover ratio cannot and may not be same for every business. It depends on the types and nature of the business, types of inventory maintained, sales pattern, nature of the inventory (whether of perishable nature), inventory carrying cost, stability of the market, risk of price fluctuation, etc.

The data required to compute inventory turnover ratio is taken from the financial statements of the company.

‘Cost of goods sold’ helps a company to work out how much they should charge for their products and services, and the level of sales required for its sustenance by making profit.

Suppose, the in the beginning of the year a company had a inventory of $25,000, purchases during the year is $45,000, direct labor cost involved in the production is $15,000, cost of electricity is $15,000 and at the end of the year company has a raw or unprocessed inventory of $10,000 in hand, if the company has sold entire processed inventory or whole of the inventory had been sent to production department, then,

Cost of Goods Sold = $ (25,000 + 45,000 + 15,000 + 15,000 — 10,000) = $90,000

Average Inventory’ is calculated by adding ‘Opening Inventory’ with ‘Closing Inventory’ and dividing the total amount by 2.

In the above illustration,

Average Inventory = (Opening Inventory + Closing Inventory) / 2 = $ (25000 + 10,000) / 2 = $17,500

Thus, the Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = $90,000 / $17,500 = 5.1428

What is Annual Receivables Ratio

“Annual Receivable Ratio” is the average time for the invoices to be paid. It has many other names such as, accounts receivable turnover ratio, debtors’ turnover ratio, etc and they all indicate the velocity or promptness of a company’s debt collection and the number of times the average receivables are turned over during a year — it determines how quickly a company collects its outstanding receivable balance from its customers during an accounting period. Like Inventory Turnover Ratio, this also indicates the operational efficiency of the company in resolving difficulties in collection of dues and maintaining sales at desired level. A popular variant unit of the receivables turnover ratio is to convert it into an Average collection period in terms of days.

It is calculated as,

Receivables turnover ratio = Net receivable sales/ Average accounts receivables, or

Accounts Receivable outstanding in days:

Average collection period (Days sales outstanding) = 365 / Receivables Turnover Ratio

Thus, annual receivable turnover ratio is the ratio of net credit sales of a business to its average accounts receivable during a given period, usually an accounting year. It is an activity ratio which estimates the number of times a business collects its average accounts receivable balance during a period.

Example

If a company ABC Ltd has credit sales of $7,000,000 in a year and its average balance in Accounts Receivable for the same twelve months was $700,000, what is its Annual Receivable Ratio?

Solution

Annual Receivable Ratio = Credit Sales for the year / Average Balance in Accounts Receivable

= ($7,000,000 / $700,000) = 10

Therefore, Annual Receivable Ratio of ABC Ltd = 10