Turnover definition
/What is Turnover?
Turnover is the rate at which an asset is replaced during a measurement period. The term is most commonly used in accounting, and refers primarily to the turnover of accounts receivable, inventory, and accounts payable - which are the components of working capital. A high level of receivables and inventory turnover is considered to be good, since a business is avoiding old receivables and the risk of obsolete inventory. A low level of payables turnover is considered to be good, since this implies that a company is taking a long time to pay its suppliers, which equates to a lengthy interest-free loan.
Receivables Turnover
The turnover concept is routinely applied to an organization’s trade receivables. When receivables have a high rate of turnover, it means that the company is able to collect from it customers within a relatively short period of time. This may be due to very short payment terms (such as ten days), or because the company has an aggressive collections team that is constantly pursuing collection on overdue receivables. A business with high receivables turnover requires a lower working capital investment than one with slow receivables turnover, since it is investing less cash in outstanding receivables.
Portfolio Turnover
The turnover concept is also used in regard to stock ownership. When an investor owns securities for long periods of time, there is said to be little turnover in his or her portfolio. Low turnover is considered to be good, since it implies that the investor is only rarely paying brokerage commissions to acquire or sell securities. The reverse situation is called churning, where securities are constantly moving in and out of a portfolio; this results in large commission payments to buy or sell securities, and can indicate poor management by an investment advisor.
Employee Turnover
The turnover concept also applies to employees, where a high level of turnover means that employees are constantly leaving a company, and must be replaced. A low level of employee turnover either implies that employees are content in their positions, or that the economy is so bad that they feel they must stay where they are. Employee turnover tends to increase during an economic upswing, when employees believe they have a better chance of finding a new job.