What it means
When a British accountant talks about turnover, they mean revenue, the total value of sales before costs are deducted. A company with $5,000,000 of turnover has sold that much, whatever its profit turns out to be.
In human resources, turnover describes how many employees leave and are replaced over a period. It is usually expressed as a percentage of the average workforce, so a business can compare itself with others or against its own past results.
In inventory and asset management, turnover describes how many times something is used up and replaced, or how efficiently an asset generates sales. Inventory turnover shows how often stock is sold in a year, and asset turnover shows how many dollars of sales each dollar of assets produces.
High employee turnover is costly. Recruiting, training and lost productivity can add up to a large fraction of a departing person's annual pay, and the exact figure varies by role and industry.
Whether a high turnover figure is good or bad depends on the type. High sales turnover and fast inventory turnover are generally healthy signs, whereas high staff turnover usually signals problems with pay, management or culture.
Because the word has so many meanings, always ask which one is meant in a report or meeting. A single sentence, such as "turnover rose 12%", could describe sales or people, and the difference changes the conclusion entirely.
In practice
Real-world examples.
Example
A UK retailer reports annual turnover of $48,000,000 and an operating profit of $2,400,000. The board's attention is on the margin, because turnover alone says nothing about how much of the sales is left after costs.
Example
A call centre sees 45% of its agents leave each year. The operations director calculates that each exit costs about $6,000 and sets up a retention bonus and a better training programme to bring the rate down. Over two years, the rate falls to 30%, and the annual cost of exits drops by about $90,000.
Example
A grocery chain compares inventory turnover across its stores. A store selling its stock 24 times a year is doing far better than one turning over just 10 times, which has fresh goods sitting too long and spoiling. Head office responds by cutting order sizes at the slower store and sharing demand data with its buyers.
Formula
Calculation
Employee turnover rate = (number of employees who left during the period / average number of employees) x 100
A company starts the year with 140 employees and ends with 160, so its average headcount is (140 + 160) / 2 = 150. During the year, 30 employees left.
Turnover rate = (30 / 150) x 100 = 20%.
If the company estimates that replacing each leaver costs $9,000 in recruiting and training, the annual cost is 30 x 9,000 = $270,000. Cutting the turnover rate to 10% would mean 15 leavers and a cost of 15 x 9,000 = $135,000, which is a saving of $135,000. These figures do not include the harder-to-measure costs, such as weaker customer service while new staff learn the job.Case study
Seen in the real world.
Redfern Cafes is a fictional chain of twelve cafes, used here as an illustrative example. The owner was pleased that turnover, meaning sales, had grown 15% to $3,600,000, but the finance manager pointed out a worrying second figure.
Staff turnover had reached 60%, meaning that for every ten baristas on the books, six left during the year. At about $2,500 to replace each person, the chain was spending roughly $90,000 a year just on churn, plus intangible costs in service quality.
The owner introduced a modest pay rise and a better rota system. In the following year, staff turnover dropped to 35%, and the finance manager showed that the cost fell by around $37,500. The fictional story shows why the same word can hide two very different signals.
Watch out
Common mistakes.
- Assuming turnover means profit. Turnover in the revenue sense is sales before any costs, so a business can have high turnover and still make a loss.
- Using the word without saying which kind. Specify sales turnover, staff turnover or inventory turnover to avoid confusion.
- Calculating employee turnover on the closing headcount rather than the average. The average gives a fairer measure when the workforce changes size during the year.
Questions
People also ask.
What is a good staff turnover rate?
It varies a lot by industry. Hospitality and retail typically see much higher rates than professional services, so compare against similar businesses.
Is turnover the same as revenue?
In British usage, yes. In American usage, the word revenue or sales is more common, and turnover often refers to staff or inventory.
Why does turnover matter to investors?
It shows the scale of the business and, when tracked over time, whether it is growing or shrinking.
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