Annual Turnover

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Annual Turnover Meaning

Annual turnover is primarily referred to as the yearly sales or yearly receipts of a profession. However, in finance, the annual turnover is commonly referred to by mutual funds and exchange-traded funds (ETF), which measure the annual investment holdings that determine the health and activity levels of the fund and can also help in comparing it with preceding years or with competitors.

Annual Turnover Meaning

Annual Turnover Formula

It is a straightforward term which includes the following:

Annual Turnover Formula = Total Sales of the Trading Company or

Total Production of a Manufacturing Company or

Total Investments held by Mutual Funds, Exchange-Traded Funds, etc. or

Gross Receipts of a Profession During the Particular Year.

Example of Annual Turnover Calculation

To explain the term, let us consider a business. Suppose a trader of clothing items sells a product at $5. Now monthly, the trader, on average, sells 1,000 products.

Calculation of Monthly Turnover of Trader

Thus monthly the trader earns $5,000 ($5 * 1,000).

Calculation of Annual Turnover of Trader

= 12*$5000
= $60,000

Thus the annual turnover of the trader is $60,000.

It shall be noted that the annual turnover figure is the sales figure before deducting the purchase, direct expenses as well as before adding non-operating incomes and other indirect incomes. Thus it is a gross figure.

Advantages

The different advantages are as follows:

It is an indicator of an entity’s earning strength. It considers total earnings based on the quoted selling price and the number of products sold. The annual turnover indicates the market strength of a company and the image of such a company among the customers.
It is a periodic amount showing the turnover over the financial year or the calendar as the case may be doing. It is a uniform figure, and uniformity can be maintained for various purposes in the business.
The annual turnover figure helps in comparison. Since it is a periodic figure, the annual turnover figure can be compared by a company with the preceding financial year or calendar year, as the case may be. Or it can be compared with the annual turnover of another product for the same financial year calendar as the case may be.
An annual turnover figure can also be used to maintain competitiveness among the entities. This figure of a particular company of a particular year can be compared with the same product of another company for the same here, and steps should be taken to match the annual turnover with the competitive firm or to exceed the same.
The net profit figure of any company is the amount obtained after deducting various expenses, both direct and indirect, and adding indirect and non-operating incomes to the annual turnover figure. However, it can be seen that the net profit figure does not show the true picture of the entity and may sometimes be misleading.
Sometimes the company earns abnormal indirect income like speculative profit, while the company's main business may be some other product. Thus the net profit might be very high, but this doesn’t reflect accurately. Thus it shows the correct picture of how much the company has set a market base.

Disadvantages

Though in the literal sense, the term annual turnover might not be a criticizing topic; however, there are some particular demerits of taking the turnover figures for decision-making purposes.

Such demerits firstly include, it may so happen that the company sells enormous products every, crossing the mark of various competitors. However, the total purchase price added to total expenses might increase turnover.
Further, there increases rigidity while taking an annual figure. In a seasonal nature firm, annual turnover might not solve the purpose of showing the correct picture of the situation.
Other times, a certain business earns tremendous profits only at a specified period. Thus an annual turnover might be a biased figure; however, considering quarterly or monthly amounts of turnover, a better and a logical conclusion can be drawn.
Usually, the company, stakeholders, and the general public consider the company's net profit for analyzing the company's well and the company's position in the market instead of considering the annual turnover figure to conclude please health.

Important Points

The different vital points are as follows:

There are various points to be considered while calculating the company's annual turnover. One of the crucial things is that the annual turnover is taken for a year, which may be a calendar year or a financial year.
Another thing to be considered here is that there is a difference between turnover and profit of the company.
Profit can be explained as the amount obtained after deduction of all the direct and indirect expenses along with the purchase, opening stock and other related costs from the turnover as well as after adding all the indirect incomes like interest, rent, dividend, profits from sales of capital assets, etc. This amount shows the cash generated from the whole trading operations and the entity's ability to increase the wealth from the business.
While on the other hand, turnover shows us the raw figure, which shows the gross sales of the business or the profession, as explained above in the definition.

Conclusion

As explained above, the annual turnover is a figure of the companies, mutual funds, or other professions, which creates uniformity among the industries for comparison and benchmarking purposes with similar companies in the same industry.

Thus annual turnover is a mandatory figure for every company in the states to show the stakeholders and general public as per the International Financial Reporting Standards (IFRS) in their financial statements, both for a current financial year and preceding financial year and in certain cases, even the opening balance of preceding financial year.