What is turnover?

Turnover is not the same as profit, although the two terms are commonly confused. Read our guide to find out the difference and learn how to calculate your business’ turnover so you can predict and maximise your profits.

Turnover is not the same as profit, although the two terms are commonly confused. Read our guide to find out the difference and learn how to calculate your business’ turnover so you can predict and maximise your profits.

Emily Kindness
From the Business team
3
minute read
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Posted 6 MAY 2021

What is turnover?

The term turnover has a few different meanings, but in business accounting, turnover refers to the total number of sales a business makes in a specific time period. In other words, it’s your business’ income. You might also hear it referred to as your gross revenue, or your ‘top line’.

You might also hear the word ‘turnover’ used to refer to how fast a business sells its stock, or the rate at which employees leave a business. Or, for businesses that extend credit to customers, it could refer to how quickly that customer pays off their debt.

What’s the difference between turnover and profit?

Turnover is an important metric for business owners, but it doesn’t give a complete picture. Turnover only measures income. It’s a good indication of whether a company’s sales are going up or down, but not all income translates into profit.

Profit is what’s left of your business turnover or income after deducting your various costs. For this reason, profit is often referred to as your ‘bottom line’.

Depending on what costs you deduct, profit can be described as gross, net or operating:

  • Gross profit is your business turnover minus the cost of making and distributing the goods or services you sell. For example, materials and shipping costs. It’s also called your sales margin.
  • Operating profit is your gross profit minus the day-to-day costs of running your business. For example, any rent or utility bills you pay for your business premises, as well as your business’ payroll (salaries), advertising costs and any loan payments.
  • Net profit is the difference between the amount of money received from selling goods and services, and all of the costs incurred which are subtracted from that. So net profit = gross profit minus the operating profit.

Why is turnover important?

All business owners will need to keep accurate records of their annual sales and turnover for tax purposes. Your business turnover determines when you must register for VAT, so it’s important to calculate it correctly. And you’ll need to know your turnover if you’re applying for a loan or looking for new investment.

Additionally, business owners can look at their turnover to see how well their product or service is selling, predict their profits and plan for the future accordingly. If turnover is increasing, it could mean it’s time to invest and expand the business, while a low turnover may suggest problems with production or issues with the quality of the product or service.

When turnover is analysed alongside net, gross and operating profits, it can give a clearer picture of a business’ health and help business owners to maximise their profit margins.

For example, if your business turnover is high but your gross profit is low, you could look for ways to reduce the cost of making and distributing your goods or services. Or if your net profit is low compared to your turnover and gross profit, you could look for ways to run your business more efficiently to reduce running costs.

How is turnover calculated?

To calculate turnover, you simply need to add up the income from all your sales within a set amount of time. You might choose to look at the quarterly or annual performance of your business.

You should subtract any trade discounts and product returns from your income as well as any VAT. Your income will include any shipping costs or associated expenses you bill to the customer, but not any commission or fees you pay to third parties like PayPal.

It’s important to remember that for tax purposes, turnover is calculated according to when you provide the goods or services, rather than when you invoice for or receive payment.

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