Revenue Vs Turnover: Meaning, Key Differences And Examples
Updated 27 September 2022
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In regard to a business, knowing the difference between revenue vs turnover is crucial, as people often use them interchangeably. Since the two terms are similar, many businesses use them synonymously in some situations. Understanding the differences between revenue and turnover can help you distinguish these values in an organisation. In this article, we discuss the key differences between revenue and turnover, explore each topic's definition and review how to calculate the two with the help of some examples.
5 Key Differences Of Revenue Vs Turnover
The following are key points that highlight the differences between revenue vs turnover:
Definition: Revenue measures the quantity of a product sold in a business in relation to its prices. Turnover looks at the number of times a business uses an element that can generate income.
Financial reporting: Many businesses use turnover rates internally as an indicator of efficiency and performance, which is why a business may choose not to mention its turnover on its income statement. But a company does list its revenue on its income statement since it typically needs that figure for other calculations.
Significance: Revenue is significant, as it reviews how stable and profitable a business is, which is vital to establish credibility for the investors and increase eligibility to avail loans. Alternatively, turnover helps a business estimate its own productivity and efficiency and identify areas that need improvement.
Variety: There are two types of revenue, operating revenue and non-operating revenue, and each one generates income in different ways. In comparison, turnover has three categories in terms of accounting and finance, which include inventory, assets and accounts receivable, each of which reflects the rate of each component generating income for the business.
Related: Assets Vs Income: Definition And Differences (With Types)
What Is Revenue?
Revenue is the income a business generates through its primary operations. It is on the top of the line on an income statement, as it is the basis for other calculations such as gross income and net income. The more revenue a business generates, the easier it is to ensure that the business is bringing in more money than it is spending. Businesses label revenue as either gross or net. Net revenue represents the figure after doing adjustments such as discounts, returns and the cost of goods sold, while gross revenue is the total sales before adjustments.
Other types of revenue bring money to a business. They include the following:
Operating revenue: Operating revenue is the income that a business generates through its core operations and can include the sale of goods, products and services that the company provides. This money comes from a business's primary functions which are the main source of its income.
Non-operative revenue: This is the revenue brought in through a business's secondary or tertiary activities. For example, when a company sells an asset or gains some interest on its financial accounts, the money it brings is typically non-operative revenue.
Related: What Is Revenue? Definition, Types, Examples And More
What Is Turnover?
In simple terms, turnover refers to replacing something old with something new. In accounting, it is a concept of calculating how quickly a business runs its operations. More turnover usually means the business is generating more income. It is the figure to gauge a business's efficiency and performance. For example, when a business records high turnover, it indicates that the business does not let its products sit in the inventory and sells them off quickly. A company need not mention turnover on its income statement.
Still, measuring it in regular intervals gives an idea about a business's growth, helps in adjusting its production and allows it to plan future business ventures. Here are a few explanations of different types of turnover:
Inventory turnover: Inventory turnover or sales turnover, is the rate at which a business builds its inventory and sells it off within a particular time.
Accounts receivable turnover: Accounts receivable turnover is how efficiently a company collects on the credit that it provides its debtors.
Asset turnover: Asset turnover measures how a business uses its assets to generate revenue. For example, when a business sells off an asset when it is not in use anymore, the income that the asset generates is asset turnover.
Related: What Is Turnover, And Why Is It Important In Business?
How To Calculate Revenue
A simple way of calculating revenue is to add the totals of both operating and non-operating revenue together. To calculate the amount of operating revenue, simply multiply the number of units the business sold by the price of each unit. For example, if a bicycle manufacturer sells 560,000 bicycles and each costs ₹3000 per unit, its gross operating revenue is about ₹168 crores. If the business also generated ₹60 lakhs in interest and ₹5 crores by selling assets, its total gross revenue is ₹173.06 crores.
For calculating net revenue, add together the total cost of factors, such as given discounts, completed returns, and the business's incurred expenses while producing the product. Then subtract the sum from the gross revenue to get the net revenue.
Related: What Is A Financial Statement? (With Importance And Types)
How To Calculate Turnover
The three different types of turnover use different formulas to calculate the factor and include the following:
The following steps allow you to calculate a business's inventory turnover:
Choose an accounting period: Businesses usually calculate inventory turnover monthly, quarterly or annually.
Determine the average inventory: For this, you can add values of the ending inventory with the beginning inventory in the selected accounting period. Then divide the result by 2.
Calculate the cost of products sold: Add together the beginning inventory and the sum of purchases and costs. The next step is to subtract the ending inventory from it.
Divide the cost of sold goods by the average inventory: Here, the inventory turnover ratio is the quotient.
Related: What Is An Accountant? Types And Career Advice
Accounts receivable turnover
Here are the steps for calculating the ratio of an accounts receivable turnover:
Select a time: Just like inventory turnover, businesses mostly calculate accounts receivable turnover monthly, quarterly or annually.
Calculate average accounts receivable: For that, add the values of accounts receivable at the beginning and end of the selected time together. Then divide it by 2.
Calculate net credit sales: To estimate the net credit score, add the values of sales returns and allowances together and then subtract the sum from the value of the credit sales.
Divide net credit sales by average accounts receivable: Here, the quotient is the accounts receivable turnover ratio.
Related: How To Become A Financial Advisor: A Complete Guide
To calculate the asset turnover ratio, you can use the following steps:
Calculate net sales: Add the total values for discounts, allowances and returns together. The next step is to subtract the sum from the gross sales.
Calculate total assets: Add together the values of the business's equity and liabilities.
Divide net sales by total assets: The quotient after dividing net sales by total sales is the asset turnover ratio.
Related: What Is A Profit And Loss Statement? (Formulas And Examples)
Examples Of Revenue And Turnover
To understand the concepts better, here are examples of revenue and turnover:
Example of revenue
Here is an example to help you understand the concept of revenue:
Twin Rivers Company produces lipstick and sells them for ₹500 per unit. The cost of producing each lipstick is ₹200. The company sold 600,000 pieces of lipstick last year. So, the gross revenue for that year is ₹30 crores. Yet, the cost incurred for those units was ₹12 crores and the total value of returns was ₹5000. In that period, the company also sold some of its assets for a total amount of ₹15 crores. Therefore, the net revenue of the company is about ₹33 crores.
Related: A Guide To Accrued Income (With Definition And Examples)
Example of turnover
Here is an example to help you understand the concept of turnover:
A manufacturing company's accountants decided to look at the most recently completed month of operations to audit the company's productivity. At the beginning of the month, the value of the inventory was ₹30 crores. When the month ended, it was ₹31 crores. The cost of goods sold during this time was ₹20 crores. Therefore, its turnover ratio for the month was 0.66. This reflects that the company went through 66% of its total inventory in a single month. Thus, it is reasonable to predict that it is going to restock inventory before the end of the second month.
Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.
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