Turnover Rate: Definition, rate and How to calculate it

Turnover Rate

The turnover rate is one of your company’s long-term performance markers. It thoroughly evaluates your company’s culture, recruiting activities, and employer brand. Keeping track of this measure is critical for staying ahead of severe business losses.

As a business owner, you must grasp what employee turnover entails, how to measure your turnover rate, and how to interpret the results.

Meaning of Turnover Rate

A turnover rate reflects the number of employees you have left, demonstrating your organization’s overall stability and health.  It is a way of keeping track of the employees that leave a company.

What is a Good Turnover Rate?

According to research, a business’s employee retention rates (as a general rule) should aim for a turnover rate of 10% or less. A turnover costs you your employees, and it is outrageously expensive and could do great harm to your business. It also makes the confidence and trust of your organization deteriorate.

This is why entrepreneurs and business organizations should keep their turnover rate at a very low percentage.

Employee Turnover Rate

Many business organizations have learned about the great losses that come with a turnover. Turnover is a process in which the employees of an organization leave and would have to be replaced.

According to research, there are a lot of reasons why various business organizations experience turnovers. It could be dissatisfaction with the job, inappropriate work ethics with colleagues, or mismanagement. There are two main types of employee turnover, they include;

  • Voluntary turnover
  • Involuntary turnover

#1. Voluntary Turnover

As the name points out, voluntary turnover is a type that indicates employees left voluntarily.

#2. Involuntary Turnover

Involuntary is a type of turnover that shows or points out the employees you, unfortunately, sacked or terminated due to personal reasons.

Employee Turnover Rate Formula

Keeping track of the turnover of employees in your business is essential. But identifying the reasons and sorting them out is a smart move.  The following are steps to take while calculating employee turnover for a business organization. They are ;

Step #1: Getting the total number of employees

The first step in calculating employee turnover for a business organization is knowing the total number of employees. While doing this, it is advisable to use an employee headcount instead of your full-time equivalents (FTEs) for calculating a business organization’s employee turnover. Also, while calculating this, there should be no exclusions from these figures.

Employees should be included in temporary layoffs or direct hire temporary workers. This makes it easier to look at it from a realistic level: temporary employees or independent contractors to the business organization’s total workforce.

It is highly recommended that employers of business organizations conduct a monthly headcount report from their human resources information system (HRIS). This helps to ensure that the total number of employees is accurately reflected.

Step #2: Acquiring the average number of employees

The second step is to get the average numbers from step 1. You can easily calculate the total number of employees on the payroll. After getting the exact number, you will divide it by the number of reports used.

Step #3: Concluding the results

This is the last step. This step involves calculating the separations of your previous work and dividing them by the average number of employees in that month specifically.

Then you can find the exact employee turnover by multiplying the number you got by 100. By doing this, you will be able to obtain a list of every employee with a termination date during that month.

Moreover, it would help if you kept in mind that the employees that are temporarily laid off or currently absent would not be counted in the total number within that month. You can easily get a list of the terminated employees within that specific month on your payroll or your HRIS.

How to Determine Your Turnover Rate

Your industry will determine how excellent or bad your estimated turnover rate is. If we continue with our example, a 25% turnover rate is nothing if you work in manufacturing or retail. However, if you work in education, you should look into the causes behind the high turnover rate.

The turnover rate is more than just a number. To better understand the information hidden behind that number, you must examine it from many perspectives. To begin, consider the following:

  • Who are the departing employees? Is it the new hires or the senior ones who are leaving?
  • Why are employees quitting? Is it the new hires departing because there is a disconnect between what they expected and what they are doing? Do you need to train them or revise your job description to attract the best candidates? If senior staff is departing, perhaps you could create an upskilling or career management program to keep them.
  • Is there a pattern to their exit? For example, if more employees leave either before or after the yearly appraisal, it is possible that they are dissatisfied with the process or your usual increment rates.

What is the most effective turnover rate formula?
You can calculate your staff turnover rate using several numbers depending on what you want to measure.

For example, if you want to demonstrate competitive retention, you would typically define separation as voluntary resignations because non-voluntary separations and retirements do not always imply that you are losing personnel to other businesses.

However, if you want to show overall turnover, you should include all separations. If you include retirements in your turnover calculation, you should make this obvious so that people understand what you’re measuring.

One intriguing and useful technique to measure turnover is to determine if the turnover rate of new hires is higher or lower than the general turnover rate.

In this example, the number of new hires who depart within a year is defined as the new hire turnover rate.

Your new recruit turnover formula would be as follows:

Employee turnover rate in the first year of employment

First Year Turnover Rate % = 100 (Number of Employees who Leave After First Year of Employment)/ (Number of Seperations During The Same Period)

What Is the Significance of Measuring Staff Turnover?

Staff turnover is a significant indicator of the effectiveness of a human resource management system as well as the overall management of an organization or program. It is a supplement to the preceding indicator on key positions filled.

Inventory Turnover Rate

There are varieties of companies and businesses that make use of Inventory turns. Due to this, there are several definitions. Inventory turnover can be defined as an indication of speed which consists of the total losses you’ve had in your business organization. However, you can easily convert a turnover into sales.

It is also the ratio between sales or the ratio between the costs and the goods sold. This helps you create value for your business organization by providing visibility. Inventory terms can be very meaningful, especially for retail or industrial companies.

Is a 10% Turnover Rate High?

A business organization needs to keep track of its turnover rate. You need to know who is leaving your business organization, when, and why they are leaving.  A spike could cause employee separations during the year, or you can look into the significant changes that occurred.

Sometimes, these spikes between employees could be caused by the team’s restructuring. If this is the case, then it would have an impact negatively. It is advisable to keep your turnover rate as low as possible to avoid running into problems in your business organization.

Is a High Turnover Rate Good?

A high turnover rate in your business organization does not necessarily mean your business is running at a loss. However, a turnover rate indicates the number of employees leaving, which is an obvious loss.

Most times, you should not just examine things from the surface because you might be looking at them from the wrong angle. When you have a turnover in your business organization, there are some things you should be on the lookout for.

For example, when your employees leave, you must observe if you are losing the lowest performers. If this is the case, you can not consider their absence a loss. Instead, when they leave, you can focus on recruiting better performers capable of the job.

On the other hand, if your business organization is losing your top employees who are skillful, this may be a sign that there is a problem with your organization’s culture. This could be caused by mismanagement.

Through thorough observation and great analysis, ever notice that there is a turnover of new employees should signal a problem. With this problem, you must check your company’s management or culture.

Turnover Rate Stocks

As an entrepreneur or business organization owner, you need to better understand your financial performance. When you finally have a better understanding of this, it will increase the value of your business, thereby yielding profits and leading to its growth.

A turnover rate in the stocks of a business organization can also be referred to as a turnover ratio. It is used to measure the stock performance of a business organization. It also indicates the difficulties and how easy it is to sell the shares of a certain stock in the market. The ratio of turnover also shows the amount of portfolio that was replaced in that specific year.

How to Calculate a Stock Turnover Ratio

As a business owner, it is important to know the ratio of turnover stock in your organization. This leads to a better understanding of your balance sheet and overall performance, increasing your profit.

A stock turnover ratio, on average, shows a business organization how long it takes to sell its stock or make a turnover.

When calculating a stock turnover ratio, it should consist of your sales figure found in your profit and loss and your closing stock figure found in your balance sheet.

The ratio = (Closing stock x 365)/Sales

This would give the average days it took for you to sell your stock.

Conclusion

As a business organization, for your business to grow, you need to keep track of your organization’s turnover. While doing this, you have to monitor all aspects of the turnover of your company. This includes; the turnover rate, the inventory turnover, the employee turnover, and the turnover rate in your stocks. All these would increase the value of your company and boost its profit.

References

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