Turnover or why fast business equals rich business
Business is a money-making box. You put capital in there, scroll and get some kind of profit at the exit. Accordingly, the more often you spin capital in a business box, the more profit you get. This is the essence of turnover in a nutshell.
But let’s understand not in a nutshell, but in a normal way. In this article, what is turnover, how it affects your business, and how to manage it wisely to keep your money making box working as it should.
What is turnover
The main definition that we will use in this article is “turnover period”. This is how long it takes a company’s asset to scroll.
The inventory turnover period is how long it takes for the inventory to completely leave the warehouse. If you buy a batch of 20 bicycles and the last of them leaves the warehouse after 25 days, then the inventory turnover period is 25 days.
The raw material turnover period is how long it takes for all your raw materials to go into production.
The accounts receivable turnover period is how long it takes counterparties to repay your debts. If you give a grace period of 15 days, then the receivables turnover period is 15 days.
Accounts payable turnover period is how long it takes you to pay off debts to your counterparties. If you are given a grace period of 10 days, then the turnover period of the lender is 10 days.
Question from the audience: “One supplier gives me 10 days of grace period, another 20, and the third 35. What is my creditors turnover period?”
Answer: take the average or divide the turnover periods by supplier. Separately, consider the turnover period of the lender for IP Petrov, IP Sidorov and IP Bzdynko.
How turnover affects business profits
An example from real life: there is a mixed martial arts club, it sells subscriptions for several classes: 8, 12 or 16. There is no time limit: you can leave your eight classes in at least a week, at least a year. But in the first case, the club will make a new sale in a week, and in the second only in a year.
Therefore, the club administrators regularly remind their clients that it would be good to sign up for the next training session. It works: in everyday life, you forget to sign up, and then they took care of you, reminded you. Those who would walk independently twice a week walk three times a week.
Clients are healthier, and the club earns more. Win-win.
And so in all businesses:
Transport company. The faster the truck fulfills the order, the earlier it will be able to take a new one. We carry out more orders, we earn more money.
Construction. The sooner we build a house, the sooner we can start the next one and the more houses we build in a year.
IT. The faster we develop an application for a customer, the earlier we can take the next application from another client.
The faster assets turn around, the more the business earns.
How turnover affects business money
Another example from life: the owner of a clothing store often traveled to fashionable cities, bought clothes and brought them to the warehouse. It so happened that she brought in more clothes than the store could sell. The warehouse was gradually filled with clothes from all sorts of different cities and collections.
We know that the purchase of warehouse stock is not an expense for the company, because the owner simply exchanged the asset “money” for the asset “clothes”. In other words, it changed the aggregate state of its assets.
But it is quite obvious that a couple of million rubles in cash looks more interesting than 150 blouses, which are in stock for a year and will lie for another three years before they are sold. And we also make the assumption that clothing does not depreciate over time.
This applies to all types of turnover:
Inventory turnover: the less clothes we have in stock, the more cash we have.
Raw material turnover: the fewer bricks we buy, the more real money we have.
Accounts receivable turnover: the faster the counterparties pay off debts to us, the more money we have.
Lender turnover: the slower we pay off debts to counterparties, the more money we have. Yes, everything is the other way around, because a creditor is when we use other people’s money, and of course it is better when we can not give it away for a longer time and use it for our own purposes.
In general, in order for the business to have a lot of money, it is necessary to live minimalistically: the minimum required amount of stocks, raw materials, too, we return the receivables as soon as possible. On the contrary, you can use a credit card for a longer time – the main thing is, do not forget to repay debts.
The shorter the turnover period for stocks, raw materials, accounts receivable, the more money you have.
To optimize turnover periods, you need to calculate them. For this there are simple formulas of the same type. Before you look at them, let’s understand the terms, otherwise it will be incomprehensible.
The number of days in the period is how long you define the turnover. Bet 30 days, which means you count the turnover per month.