Turnover is without a doubt, one of the most useful measures of success, however, you should not confuse this with profit. The two things, though similar, are not the same. This article will now walk you through how to work turnover out, while also telling you what it is in simple terms that are easy to understand
Understanding how well your business is performing is not an exact science, though turnover can be one of the key indicators in working it out.
If you are in need of guidance on how to calculate turnover, you should look no further than here; you have come to the right place.
By reading this guide you will discover the information you need to know to ensure your business is performing well.
What is business turnover?
Business turnover is simply referred to as “income” or “gross revenue,” it is the complete sum of sales made over a given period. Whereas profit measures overall earnings, turnover measures everything that’s actually coming into your business on the top line before expenses have been deducted.
The definition of business turnover
Turnover is the entire sales made by a business in a specific period. It’s occasionally alluded to as ‘gross revenue’ or ‘income’. This is different to profit, which is a measure of earnings. It is vital that you do not mix up these keywords as you try to conclude your calculations.
It’s a significant proportion of your business’ performance. Understanding your turnover figure is helpful all through the entire existence of your business – from planning and securing investment, through analysing performance, to working out the value of your company if you ever want to sell up.
There are also a couple of other possible meanings of turnover that don’t allude strictly to your finances. For instance, ‘turnover’ can likewise mean the quantity of employees that leave a business inside a particular period, additionally at times known as ‘churn’.
Or then again, if you offer credit to clients or customers, you may likewise measure ‘accounts receivable turnover’ – the time allotment it takes your clients to pay.
Our article will only discuss turnover as it connects directly with your business income.
Turnover vs profit, what is the difference?
People often confuse the two, though turnover and profit are indeed different from one another in business terms.
Turnover is your net sales figure, which is the total business income during a set period of time.
Profit, however, refers to the earnings of a business after the deductions have been subtracted.
It’s quite significant that there are two distinct ways you can quantify profit. ‘Gross profit’ signifies sales, minus the expense of the work and products you sell – it’s likewise called the ‘sales margin’.
‘Net profit’ is the figure that is left over during a particular period after all costs (such as administration and tax expenses) have been deducted.
How to calculate business turnover – small businesses
Working out your turnover is a pretty simple process. If you have been in the good habit of keeping accurate records (which is wise to do for tax purposes anyway), you will find that this is also a fast process and one that will not cause you much trouble at all. Keep in mind that turnover is measured over a specific period, a tax year, for instance.
Deduct the cost of your sales from your turnover to work out the gross profit.
To work out the net profit, you should take your gross profit and deduct all other expenses – don’t forget your tax liabilities.
Below is an example calculation:
– cost of goods sold £20,000
= Gross profit £30,000
– operating expenses £15,000
= Net profit £15,000
Why is turnover important for business?
Business owners genuinely must understand their turnover, predominantly so they can work out what they need to bring in to meet their target profit.
Assuming that your gross profit is low in comparison to your turnover, you should take a gander at ways of diminishing the expense of your sales – for instance, by rethinking contracts with suppliers.
If your net profit is low as a proportion of your turnover, you may check out ways of making your business more effective. For instance, are there any savings you can make on administrative costs? Or then again would you say you are certain that you’re claiming all your business’ allowable expenses?
For additional ways of doing a business health check, consider doing a balance sheet, or use a budget calculator if you are self-employed
Turnover should not be a measure of success
Every business makes sales but not all of these sales are profitable, which means that turnover doesn’t necessarily indicate success of a business, it only measures the size of it.
The increase or decrease in turnover over time gives an idea of how well a business is growing. Even when the level of sales remains static, the turnover may increase slightly, year on year. This can be due to prices being pushed upwards by inflation.
To understand why the level of turnover is changing requires a more detailed look at where the sales are coming from. Take retailers for example. They are particularly careful to compare like-for-like sales, the turnover coming from the same stores or product lines over the same period of time. If a business opens new branches the turnover should be going up, but that could mask a decline in sales from older stores or across the entire market.