What Is Annual Turnover?

Annual turnover is the percentage rate at which something changes ownership over the course of a year. For a business, this rate could be related to its yearly turnover in inventories, receivables, payables, or assets.

In investments, a mutual fund or exchange-traded fund (ETF) turnover rate replaces its investment holdings on a yearly basis. Portfolio turnover is the comparison of assets under management (AUM) to the inflow, or outflow, of a fund’s holdings. The figure is useful to determine how actively the fund changes the underlying positions in its holdings. High figure turnover rates indicate an actively managed fund. Other funds are more passive and have a lower percentage of holding turnovers. An index fund is an example of a passive holding fund.

Calculating Annual Turnover

To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the average assets held by the fund over the same year.


$\begin{aligned}&\text{portfolio turnover}\ =\ \frac{\operatorname{max}\begin{cases} \text{fund purchases}\\ \quad \text{fund sales}\end{cases}}{\text{average assets}}\end{aligned}$​portfolio turnover = average assetsmax{fund purchasesfund sales​​​

For example, if a mutual fund held $100 million in assets under management (AUM) and $75 million of those assets were liquidated at some point during the measurement period, the calculation is:


$\begin{aligned}&\frac{\$75\text{m}}{\$100\text{m}}=0.75\\&\textbf{where:}\\&\text{m}=\text{million}\end{aligned}$​$100m$75m​=0.75where:​

It is important to note that a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year. Instead, the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total AUM for the year. Also, using the same formula, the turnover rate is also measured by the number of securities bought in the measurement period.

Annualized Turnover in Investments

Annualized turnover is a future projection based on one month—or another shorter period of time—of investment turnover. For example, suppose that an ETF has a 5% turnover rate for the month of February. Using that figure, an investor may estimate annual turnover for the coming year by multiplying the one-month turnover by 12. This calculation provides an annualized holdings turnover rate of 60%.

Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks. Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who consistently beat the indices stay on the job and attract significant capital inflows.

While the passive versus active management argument persists, high volume approaches can realize moderate success. Consider the American Century Small Cap Growth fund (ANOIX), a four-star-rated Morningstar fund with a frantic 141% turnover rate (as of February 2021) that outperformed the S&P 500 Index considently over the last 15 years (through 2021).

Passively Managed Funds

Index funds, such as the Fidelity 500 Index Fund (FXAIX), adopt a buy-and-hold strategy. Following this system, the fund owns positions in equities as long as they remain components of the benchmark. The funds maintain a perfect, positive correlation to the index, and thus, the portfolio turnover rate is just 4%. Trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index. More than 60% of the time, indices have historically outpaced managed funds.

Also, it is important to note, a high turnover rate judged in isolation is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, trailed the S&P 500 by 2.57% in 2020.

Annual Turnover in Business: Inventory Turnover

Businesses use several annual turnover metrics for understanding how well the business is running on a yearly basis. Inventory turnover measures how fast a company sells inventory and how analysts compare it to industry averages. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.

The speed at which a company can sell inventory is a critical measure of business performance. Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

What Is an Average Collection Period?

Average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable (AR). Companies use the average collection period to make sure they have enough cash on hand to meet their financial obligations. The average collection period is an indicator of the effectiveness of a firm’s AR management practices and is an important metric for companies that rely heavily on receivables for their cash flows.

How Average Collection Periods Work

Accounts receivable is a business term used to describe money that entities owe to a company when they purchase goods and/or services. Companies normally make these sales to their customers on credit. AR is listed on corporations’ balance sheets as current assets and measures their liquidity. As such, they indicate their ability to pay off their short-term debts without the need to rely on additional cash flows.

The average collection period is an accounting metric used to represent the average number of days between a credit sale date and the date when the purchaser remits payment. A company’s average collection period is indicative of the effectiveness of its AR management practices. Businesses must be able to manage their average collection period to operate smoothly.

A lower average collection period is generally more favorable than a higher one. A low average collection period indicates that the organization collects payments faster. However, this may mean that the company’s credit terms are too strict. Customers who don’t find their creditors’ terms very friendly may choose to seek suppliers or service providers with more lenient payment terms.

Formula for Average Collection Period

Average collection period is calculated by dividing a company’s average accounts receivable balance by its net credit sales for a specific period, then multiplying the quotient by 365 days.

Average Collection Period = 365 Days * (Average Accounts Receivables / Net Credit Sales)

Alternatively and more commonly, the average collection period is denoted as the number of days of a period divided by the receivables turnover ratio. The formula below is also used referred to as the days sales receivable ratio.

Average Collection Period = 365 Days / Receivables Turnover Ratio

The average receivables turnover is simply the average accounts receivable balance divided by net credit sales; the formula below is simply a more concise way of writing the formula.

Average Accounts Receivables

For the formulas above, average accounts receivable is calculated by taking the average of the beginning and ending balances of a given period. More sophisticated accounting reporting tools may be able to automate a company’s average accounts receivable over a given period by factoring in daily ending balances.

When analyzing average collection period, be mindful of the seasonality of the accounts receivable balances. For example, analyzing a peak month to a slow month by result in a very inconsistent average accounts receivable balance that may skew the calculated amount.

Net Credit Sales

Average collection period also relies on net credit sales for a period. This metric should exclude cash sales (as those are not made on credit and therefore do not have a collection period).

In addition to being limited to only credit sales, net credit sales exclude residual transactions that impact and often reduce sales amounts. This includes any discounts awarded to customers, product recalls or returns, or items re-issued under warranty.

Importance of Average Collection Period

Average collection period boils down to a single number; however, it has many different uses and communicates a variety of important information.

• It tells how efficiently debts are collected. This is important because a credit sale is not fully completed until the company has been paid. Until cash has been collected, a company is yet to reap the full benefit of the transaction.
• It tells how strict credit terms are. This is important as strict credit terms may scare clients away; on the other hand, credit terms that are too loose may attract customers looking to take advantage of lenient payment terms.
• It tells how competitors are performing. This is important because all figures needed to calculate the average collection period are available for public companies. This gives deeper insight into what other companies are doing and how a company’s operations compare.
• It tells early signals of bad allowances. This is important because as the average collection period increases, more clients are taking longer to pay. This metric can be used to signal to management to review its outstanding receivables at risk of being uncollected to ensure clients are being monitored and communicated with.
• It tells of a company’s short-term financial health. This is important because without cash collections, a company will go insolvent and lack the liquidity to pay its short-term bills.

How to Use Average Collection Period

The average collection period does not hold much value as a stand-alone figure. Instead, you can get more out of its value by using it as a comparative tool.

The best way that a company can benefit is by consistently calculating its average collection period and using it over time to search for trends within its own business. The average collection period may also be used to compare one company with its competitors, either individually or grouped together. Similar companies should produce similar financial metrics, so the average collection period can be used as a benchmark against another company’s performance.

Companies may also compare the average collection period with the credit terms extended to customers. For example, an average collection period of 25 days isn’t as concerning if invoices are issued with a net 30 due date. However, an ongoing evaluation of the outstanding collection period directly affects the organization’s cash flows.

Example of Average Collection Period

As noted above, the average collection period is calculated by dividing the average balance of AR by total net credit sales for the period, then multiplying the quotient by the number of days in the period.

Let’s say a company has an average AR balance for the year of $10,000. The total net sales that the company recorded during this period was $100,000. We would use the following average collection period formula to calculate the period:

($10,000 ÷ $100,000) × 365 = Average Collection Period

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The average collection period, therefore, would be 36.5 days. This is not a bad figure, considering most companies collect within 30 days. Collecting its receivables in a relatively short and reasonable period of time gives the company time to pay off its obligations.

If this company’s average collection period was longer—say, more than 60 days— then it would need to adopt a more aggressive collection policy to shorten that time frame. Otherwise, it may find itself falling short when it comes to paying its own debts.

Accounts Receivable (AR) Turnover

The average collection period is closely related to the accounts turnover ratio, which is calculated by dividing total net sales by the average AR balance.

Using the previous example, the AR turnover is 10 ($100,000 ÷ $10,000). The average collection period can also be calculated by dividing the number of days in the period by the AR turnover. In this example, the average collection period is the same as before: 36.5 days.

365 days ÷ 10 = Average Collection Period

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Collections by Industries

Not all businesses deal with credit and cash in the same way. Although cash on hand is important to every business, some rely more on their cash flow than others.

For example, the banking sector relies heavily on receivables because of the loans and mortgages that it offers to consumers. As it relies on income generated from these products, banks must have a short turnaround time for receivables. If they have lax collection procedures and policies in place, then income would drop, causing financial harm.

Real estate and construction companies also rely on steady cash flows to pay for labor, services, and supplies. These industries don’t necessarily generate income as readily as banks, so it’s important that those working in these industries bill at appropriate intervals, as sales and construction take time and may be subject to delays.

The Bottom Line

The average collection period is the average number of days it takes for a credit sale to be collected. During this period, the company is awarding its customer a very short-term “loan”; the sooner the client can collect the loan, the earlier it will have the capital to use to grow its company or pay its invoices. While a shorter average collection period is often better, too strict of credit terms may scare customers away.

What Is the Accounts Payable Turnover Ratio?

The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off its accounts payable during a period.

Accounts payable are short-term debt that a company owes to its suppliers and creditors. The accounts payable turnover ratio shows how efficient a company is at paying its suppliers and short-term debts.

The AP Turnover Ratio Formula


$\begin{aligned} &\text{AP Turnover}=\frac{\text{TSP}}{(\text{BAP + EAP})/2}\\ &\textbf{where:}\\ &\text{AP = Accounts payable}\\ &\text{TSP = Total supply purchases}\\ &\text{BAP = Beginning accounts payable}\\ &\text{EAP = Ending accounts payable}\\ \end{aligned}$​AP Turnover=(BAP + EAP)/2TSP​where:AP = Accounts payableTSP = Total supply purchasesBAP = Beginning accounts payableEAP = Ending accounts payable​

Calculating the Accounts Payable Turnover Ratio

Calculate the average accounts payable for the period by adding the accounts payable balance at the beginning of the period from the accounts payable balance at the end of the period.

Divide the result by two to arrive at the average accounts payable. Take total supplier purchases for the period and divide it by the average accounts payable for the period.

Decoding Accounts Payable Turnover Ratio

The accounts payable turnover ratio shows investors how many times per period a company pays its accounts payable. In other words, the ratio measures the speed at which a company pays its suppliers. Accounts payable is listed on the balance sheet under current liabilities.  

Investors can use the accounts payable turnover ratio to determine if a company has enough cash or revenue to meet its short-term obligations. Creditors can use the ratio to measure whether to extend a line of credit to the company.

A Decreasing AP Turnover Ratio

A decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. The rate at which a company pays its debts could provide an indication of the company’s financial condition. A decreasing ratio could signal that a company is in financial distress. Alternatively, a decreasing ratio could also mean the company has negotiated different payment arrangements with its suppliers.

An Increasing Turnover Ratio

When the turnover ratio is increasing, the company is paying off suppliers at a faster rate than in previous periods. An increasing ratio means the company has plenty of cash available to pay off its short-term debt in a timely manner. As a result, an increasing accounts payable turnover ratio could be an indication that the company managing its debts and cash flow effectively.

However, an increasing ratio over a long period could also indicate the company is not reinvesting back into its business, which could result in a lower growth rate and lower earnings for the company in the long term. Ideally, a company wants to generate enough revenue to pay off its accounts payable quickly, but not so quickly the company misses out on opportunities because they could use that money to invest in other endeavors.

AP Turnover vs. AR Turnover Ratios

The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid.

The accounts payable turnover ratio is used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off its accounts payable during a period.

Accounts receivable turnover shows how quickly a company gets paid by its customers while the accounts payable turnover ratio shows how quickly the company pays its suppliers.

Limitations of AP Turnover Ratio

As with all financial ratios, it’s best to compare the ratio for a company with companies in the same industry. Each sector could have a standard turnover ratio that might be unique to that industry.

A limitation of the ratio could be when a company has a high turnover ratio, which would be considered as a positive development by creditors and investors. If the ratio is so much higher than other companies within the same industry, it could indicate that the company is not investing in its future or using its cash properly.

In other words, a high or low ratio shouldn’t be taken on face value, but instead, lead investors to investigate further as to the reason for the high or low ratio.

Example of the Accounts Payable Turnover Ratio

Company A purchases its materials and inventory from one supplier and for the past year had the following results:

• Total supplier purchases were $100 million for the year.
• Accounts payable was $30 million for the start of the year while accounts payable came in at $50 million at the end of the year.
• The average accounts payable for the entire year is calculated as follows:
• ($30 million + $50 million) / 2 or $40 million
• The accounts payable turnover ratio is calculated as follows:
• $100 million / $40 million equals 2.5 for the year
• Company A paid off their accounts payables 2.5 times during the year.

Assume that during the same year, Company B, a competitor of Company A had the following results for the year:

• Total supplier purchases were $110 million for the year.
• Accounts payable of $15 million for the start of the year and by the end of the year had $20 million.
• The average accounts payable is calculated as follows:
• ($15 million + $20 million) / 2 or $17.50 million
• The accounts payable turnover ratio is calculated as follows:
• $110 million / $17.50 million equals 6.29 for the year
• Company B paid off their accounts payables 6.9 times during the year. Therefore, when compared to Company A, Company B is paying off its suppliers at a faster rate.

What Is Attrition in Business?

The term attrition refers to a gradual but deliberate reduction in staff numbers that occurs as employees leave a company and are not replaced.

It is commonly used to describe the downsizing of a firm’s employee pool by human resources (HR) professionals. In this case, downsizing is voluntary, where employees either resign or retire and aren’t replaced by the company.

Understanding Attrition

Employee attrition refers to the deliberate downsizing of a company’s workforce. Downsizing happens when employees resign or retire. This type of reduction in staff is called a hiring freeze. It is one way a company can decrease labor costs without the disruption of layoffs.

There are a number of reasons why employee attrition takes place. They include:

• Unsatisfactory pay and/or benefits
• Lack of opportunity
• Poor workplace conditions
• Poor work-life balance
• Illness and death
• Retirement
• Relocation

Types of Attrition

Voluntary Attrition

Voluntary attrition occurs when employees leave a company of their own volition. Employees leaving voluntarily may indicate that there are problems at the company. Or, it may mean that people have personal reasons for departing that are unrelated to the business.

For example, some employees voluntarily leave when they get a new job elsewhere. They may be moving to a new area which makes the commute impossible. They might have decided to try a different career and therefore need a different type of job.

Voluntary attrition can also occur when employees retire. This is also referred to as natural attrition. Unless a company experiences an unusually high rate of early retirements, employees retiring shouldn’t be a cause for concern for management.

Involuntary Attrition

Involuntary attrition occurs when the business dismisses employees. This can happen because of an employee’s poor or disruptive performance. Dismissal might be tied to an employee’s misconduct.

Companies may have to eliminate an employee’s position. Or, they might have to lay off employees due to worrisome economic conditions.

Internal Attrition

Internal attrition refers to movement out of one department or division and into another. The employee isn’t leaving the company. They’re simply making a move within it.

For instance, internal attrition can occur when an employee gets promoted to a different management level. Or, they move laterally to a different section because a job there was more suitable.

Internal attrition can signal that a company offers good opportunities for career growth. On the other hand, if one department has a high internal attrition rate, it may be experiencing problems. The company should investigate and address them, if need be.

Demographic-Related Attrition

Demographic-related attrition results when people identified with certain demographic groups depart a company unexpectedly and quickly. These could be women, ethnic minorities, veterans, older employees, or those with disabilities.

Such an exodus could mean that employees have encountered some form of harassment or discrimination. That should be of concern to all companies because such behavior can undermine a positive workplace environment and successful business operations.

Action should be taken quickly to understand what caused such departures. Rectifying demographic-related attrition is a must because inclusion should be a top goal of every company. Plus, a company can put a halt to the loss of employees of great value and promise. Diversity training can help.

Customer Attrition

While not related to employee attrition, it’s important that a business also be aware of customer attrition.

Customer attrition happens when a company’s customer base begins to shrink. The rate of customer attrition is sometimes referred to as the churn rate. Customer attrition can mean that a company is in trouble and could suffer a loss of revenue.

Customer attrition can take place for a variety of reasons:

• Loyal customers switch their preference to products of another company
• Aging customers aren’t being replaced by younger ones
• Bad customer service
• Changes in product lines
• Failure to update product lines
• Poor product quality

Benefits of Attrition

Attrition has its positive aspects. By its simplest definition, it’s a natural diminishing of the workforce. This can be welcome when the economy is in bad shape or a recession looms and, if not for attrition, a company would face the prospect of having to lay off employees (when it doesn’t want to lose them).

Here are other times when attrition might help:

• If one company acquires another and must deal with redundancies.
• If a company redirects its vision toward a new goal and must restructure or reduce the workforce.
• When new employees are needed to refresh a workplace environment with new ideas and new energy.
• When a company seeks natural opportunities to better diversify a department or division.
• When employees with poor attitudes or performance should be removed to improve workplace culture, reduce costs, or make room for new hires who are a great fit.

The Attrition Rate

The attrition rate is the rate at which people leave a company during a particular period of time. It’s useful for a business to track attrition rates over time so it can see whether departures are increasing or decreasing. A change in the attrition rate can alert management to potential problems within the company that may be causing employee departures.

The formula for the attrition rate is:

Attrition rate = number of departures/average number of employees¹ x 100

Say that 25 employees left ABC Company last year. In addition, the company had an average of 250 employees for the year ((200 + 300)/2).

With those figures, you can now calculate the attrition rate:

Attrition rate = 25/250 x 100

Attrition rate = 0.1 x 100

Attrition rate = 10%

¹ To calculate the average number of employees, add the number that existed at the beginning of the time period to the number that existed at the end of the time period. Then, divide by two.

Why It’s Important to Measure Attrition

By measuring attrition rates, a company may pinpoint problems that are causing voluntary attrition. That’s important because the costs associated with losing valuable employees whom you’d like to retain can be staggering.

For example, the cost to hire and train a new employee when one employee voluntarily departs can be one-half to two times that employee’s annual salary.

Company profits can be affected negatively when knowledgeable, experienced employees leave and productivity suffers.

Loss of customers can go hand in hand with loss of valued employees. That can mean another hit to profits tied to former employees who understood company products and services, and how to sell them.

Attrition vs. Layoffs

Sometimes, employees choose to leave an existing job to take a new one or because they’re retiring. An attrition policy takes advantage of such voluntary departures to reduce overall staff.

Laying off employees doesn’t involve a voluntary action on the part of the employee. However, layoffs do result in attrition when a company doesn’t immediately hire as many new employees as it laid off.

Layoffs occur when a company is faced with a financial crisis and must cut its workforce to stay afloat.

Sometimes, due to changes in company structure or a merger, certain departments are trimmed or eliminated. Rather than relying on natural attrition associated with voluntary employee departures, this usually requires layoffs.

Attrition vs. Turnover

Turnover takes place in a company’s workforce when people leave their job and are replaced by new employees. In such instances, there is no attrition.

Employee turnover is generally counted within a one-year period. This loss of talent occurs in a company for many reasons. As with voluntary attrition, employees may retire, relocate, find a better job, or change their career.

Companies can study turnover to make needed changes. For instance, many employees leaving within a short period of time probably signals issues within a company that must be dealt with.

Just as with voluntary attrition, management can use turnover information to initiate changes that will make the company a more amenable place for new and existing employees.

The Bottom Line

Attrition refers to the gradual but deliberate reduction in staff that occurs as employees leave a company and aren’t replaced.

Employees may leave voluntarily or involuntarily. Or, they may simply move from one department to another. In that case, attrition occurs when the former department doesn’t replace the employee. Employees may also leave for reasons of discrimination.

Calculating and tracking attrition rates can be useful to companies. High attrition rates indicate more people are leaving. They can signal that some problem is causing these departures and must be dealt with to improve the working environment.

Of course, a certain level of attrition can be helpful because it can avoid the need for layoffs in difficult economic times.