Turnover is an accounting term that measures how quickly a business collects cash from it account receivable or how fast its inventories are getting depleted. The most significant assets of the business are the inventories and the account receivable and therefore how first they get out of the business organization determines the stability of the business. Therefore, the turnover measure how fast the business collects cash into the business (Weygandt, Kimmel, & Kieso, 2015). Furthermore, the business uses the turnover to determine how fast the inventories are increasing or decreasing.
For account receivable, the turnover is merely a measure of the uncollected amount of money at any given time. The turnover ratio formula is, therefore, the credit sales divided by average account receivable. The average account receivable is merely the average at the beginning and the end of a given financial period. Therefore the main aim is to make the account receivable as small as possible while making maximum sales.
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Consequently, a large turnover implies that the firm is making more sales and having less in the account receivables. The same applies to stocks where the brokerage companies earn more when the turnover is large. The small turnover ratio indicates that the company is having more in its inventory and account receivable. That illustrates fewer sales and therefore an indication that the business should change its business strategy.
The trend in turnover ratio is its use in most business to determine the levels of its sales. At FedEX the mutual funds are at $250 million under the asset management. The portfolio manager decides to sell 25 of the securities in the financial year which gives a turnover ratio of 10. This is a perfect move as it contributes to the growth of the company.
References
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting . John Wiley & Sons.
