Sales turnover rate is a financial calculation used by businesses across industries to assess their financial position at any given time. It can give businesses valuable insight into the value of their inventory, business performance and current profitability. Understanding how to calculate your sales turnover rate can help you make more informed financial decisions and better manage the finances of your business. In this article, we discuss what sales turnover is, learn why it's important, review how to calculate it and provide you with relevant examples.

What is sales turnover rate?
Sales turnover rate is the total amount of products or services sold by a business during a specified period. The period used in the calculation of this rate can vary depending on the information the business is trying to extract. For example, calculating the monthly turnover rate can help businesses identify periods of demand, while calculating the yearly turnover rate can help businesses identify their profit margins and compare their sales to previous years to better understand the changes to their demand. 

Why is it important? 
Turnover rate can help businesses to have a better understanding of their overall finances and can help them to make more informed decisions. This rate can also help businesses with inventory planning and anticipating the demand for their products, which can help reduce the time inventory spends in storage. It can also provide valuable information in relation to revenue trends and growth and sales tracking. Tracking the yearly sales turnover rate can help businesses predict their growth and identify periods of increased demands. They can then use this information in production schedules, warehouse planning and promotional scheduling. 

Sales turnover vs. inventory turnover
While similar in nature, these two concepts provide insight into different aspects of business operations. Sales turnover primarily focuses mostly on the amount of sales that happen during a set period, while inventory turnover focuses amount of inventory that was sold during the period. The key difference is that businesses can measure inventory turnover in units, whereas they measure sales turnover in products sold and the number of sales. This can have an impact when you frequently have sales of multiple items or are looking to track the movement of high-value items.

How to Calculate Sales Turnover Rate
You can determine your business's sales turnover rate by dividing the number of sales by the amount of product you have sold. Here is a list of steps you can follow to calculate a sales turnover rate for your business:

1. Choose a sales period
When calculating a sales turnover rate, it's important to choose the sales period from where you can pull the information. Choose a completed sales period because you cannot get an accurate sales turnover rate during an active sales period. You can decide if you would like to do a monthly, quarterly or annual sales period, depending on your goals.

2. Determine the COGS
Since the equation requires you to calculate the cost of goods sold (COGS) divided by the average price of your products in order to find your sales turnover rate, you can first determine the COGS. You can do this by adding the starting inventory costs to the extra inventory expenses. Once you have your calculation, subtract your total number of ending inventory from it, and then you have your total COGS. The formula looks like this:
(Starting inventory cost + extra inventory expenses) - ending inventory = COGS

3. Find your average inventory
Determining your average inventory is the next step in calculating your sales turnover rate. To find your average inventory, add the amount of your starting and ending inventory together, then divide by two. The formula looks like this:
(Starting inventory + ending inventory) / 2 = Average inventory

4. Complete your calculations
To complete your calculations, divide the cost of goods sold by the number of average inventory and you have the value of your sales turnover rate. The formula looks like this:
COGS / Average inventory = Sales turnover rate

Sales turnover rate example
Here is an example of a sales turnover rate calculation:
Johnny's Grocer wants to calculate its quarterly sales turnover rate to see how much product it should order for the next quarter. They estimate the store has $100,000 in starting inventory at the beginning of a quarter, $25,000 of extra inventory expenses and $10,000 of ending inventory at the end of a quarter. Johnny's Grocer finds its COGS by adding the starting inventory to its extra inventory costs, which is $100,000 plus $25,000 which equals $125,000. Then, they subtract the ending inventory, which is $10,000, making the total COGS $115,000.
Next, to calculate the store's average inventory, they add their starting and ending inventory together, $100,000 plus $10,000 which equals $110,000. Then they divide by 2, resulting in $55,500. To finish, they divide their COGS by their average inventory, which is $115,000 divided by $55,000, making their sales turnover a rate of 2.09. This means Johnny's Grocer has sold its average inventory more than two times during one sales period.

Turnover Rate Best Practices
Consider the following best practices when doing your own turnover calculations: 

Complete your calculations regularly
When calculating your turnover rate, consider doing it regularly. Tracking your turnover rate over time can help you gain valuable insights into business performance. Consider calculating your turnover rate at regular periods, such as the end of the year following the same method each time. You can then monitor your numbers to predict trends, forecast demand periods and understand the response of business decisions. 

Check your inventory system
Turnover rate provides valuable information about the management and design of your inventory system. The longer you hold an item in inventory, the greater an expense it is to a business. As you've already paid to have the item manufactured, and have yet to gain income from it, it results in a negative profit until sold. Using turnover rate, you can predict inventory demands and cater your inventory levels to these predictions. Cross-referencing your turnover rates with inventory levels can help you better balance your inventory and reduce the amount of time an item sits on the shelf. 

Check your numbers
Inventory can play a large factor in your turnover calculation so ensuring your inventory levels are accurate is essential to having reliable data. Consider completing your calculation around audits or inventory checks to ensure your numbers are as accurate as possible. Having a reliable inventory management system can help you catch any discrepancies in inventory, missing items or inaccurate records before they start to affect your financial calculations. 

Define your ideal turnover rate
Financial calculations are most valuable when they have a reference point. Establish what your ideal sales turnover rate is and compare your future values to this number. Reference points allow anyone, regardless of their position in the business, to understand metrics and see how they affect business decisions. Reference points can change over time as your goals and business performance do. Consider revisiting them as you evaluate your yearly business performance and reflect on if they need to be revised to reflect new goals or standards. 

Use the correct variables
When figuring out your sales turnover, it's vital to use the correct variables needed for accurate calculations. There are many financial figures involved in a company's sales, so it's important that you pull the correct numbers. Here is a list of the variables to use when calculating sales turnover rate:
Starting inventory: This is the number of inventory at the beginning of an accounting period before you sell any product.
Extra inventory expenses: These are the expenses that occur during purchasing and selling products that companies can account for. It may include shipping costs, taxes or storage costs.
Ending inventory: Ending inventory is the amount of product a company has in stock at the end of an accounting year.
Cost of goods sold (COGS): This is the entire cost of producing products sold by a business, which can include materials and labor.
Average inventory: This is a calculation that estimates the value of products that a business produces and sells.
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