Sometimes referred to as a turnover in inventory or an inventory turnover, a sales turnover is a measurement of how often and how much of the company’s finished goods are sold within a specified period of time. Companies may evaluate sales turnover on a monthly, quarterly or even an annual basis, depending on the nature of the products sold and the operating structure of the business. Determining the sales turnover for a period or even a succession of periods can help a company make adjustments in production that help to prevent high inventories of finished goods from sitting in warehouses, or aid the business in adjusting production so that there are enough finished goods on hand to meet consumer demand in upcoming periods.
With a sales turnover, the ultimate goal of any company is to achieve a high turnover rate. When the turnover is high, this means that a significant percentage of the finished goods on hand are being sold quickly, rather than languishing in storage for a long period of time. The benefits to a high sales turnover include less of a tax liability on those stored finished goods, and possibly a reduction in the amount of warehouse space that must be leased to house those goods between production and sale. At the same time, a high turnover also means that the resources invested in manufacturing the products generates a quicker return from customer sales, allowing the business to enjoy a more desirable level of cash flow.
By contrast, a low sales turnover is often a sign that the business needs to make some changes. Low turnovers mean that sales to consumers are not in balance with the rate of production, resulting in higher inventories of finished goods. This translates into higher taxes on the volume of finished goods, more storage expenses to house the products until they finally do sell, and a longer period to generate revenue from the resources used to create the finished goods. When a low sales turnover is present, the company will look for ways to promote additional sales while also taking steps to curtail production to some extent, at least until the overabundance of finished goods is reduced to a reasonable level.
Since sales can undergo shifts in volume from one period to the next, companies can track historical turnover as a means of projecting what will happen in future periods and adjust production accordingly. For example, if a company usually experiences a slump in sales during the third quarter, begins recovery during the fourth quarter and then sees a dramatic increase in demand during the first quarter of the following year, production schedules can be adapted to comply with the trend and help keep sales turnover somewhat more balanced form one quarter to the next.