What Is Financial Turnover?

"Financial turnover" is a term that is utilized in a couple of different ways in the business world. One common use has to do with the amount of business volume that is generated within a specified time frame in relation to the profits that are generated within that same period. A slightly different form of financial turnover has to do with the relationship between the sales generated during a given period and the impact those sales have on the inventory of finished goods. With both applications, the basic idea behind financial turnover is to determine how efficiently some type of asset is being utilized in order to generate a desirable level of return.

Evaluating financial turnover often focuses on determining if the efforts used to produce a certain outcome are actually resulting in enough benefits to make the effort worthwhile. For example, if the focus is on the relationship between the amount of finished goods produced during a certain period versus the total amount of sales made during the same time frame, the desire is for a high turnover to occur and generate a significant amount of money for the firm. A high financial turnover in this scenario would mean that a large portion of the generated inventory would be sold to customers within the period under consideration, a situation that would be considered very desirable. With a low financial turnover, sales would lag far behind production resulting in a larger inventory at the end of the period, a situation that would not be in the best interests of the company.

As with other types of turnovers, companies want to find the ideal balance between utilizing their resources and generating revenue that in turn translates into a decent level of profit. In order to do this, analyzing the financial turnover from one period to the next can make it possible to adjust production as well as sales and marketing efforts so that the business is producing enough products to meet consumer demand, but not to the point that finished goods languish in warehouses for months. Since demand for many goods and services can shift due to factors such as seasonality, competition, or even changes in the general economy that impact how consumers spend their money, evaluating the financial turnover on a fairly regular basis is an excellent idea.

Businesses will sometimes use financial turnover in reference to how assets such as stocks and other securities held as investments are managed. In this scenario, the idea is to measure the level of turnover in the portfolio assets from one period to the next that is necessary to achieve the goals set for the returns earned by those investments. Depending on the nature of the investments involved, replacing some assets with others may be necessary in order to grow the portfolio. At other times, very little turnover is required, if all the assets involved are performing at acceptable levels.