What is the definition of turnover?
Turnover is the total sales made by a business in a certain period. It's sometimes referred to as ‘gross revenue’ or ‘income’. This is different to profit, which is a measure of earnings.
It’s an important measure of your business’s performance. Knowing your turnover figure is useful throughout the whole life of your business – from planning and securing investment, through measuring performance, to valuing your company if you plan to sell.
There are also a few other potential definitions of turnover that don’t refer directly to your finances. For example, ‘turnover’ can also mean the number of employees that leave a business within a specific period, also sometimes known as the ‘employee churn rate’.
Or, if you offer credit to customers or clients, you might also measure ‘accounts receivable turnover’ – the length of time it takes your customers to pay.
Turnover can also be used to describe how often your inventory or stock is replaced. A low inventory turnover means sales could be slow, while a high inventory turnover could indicate a strong sales performance.
Our article discusses turnover as it relates to your business income.
Turnover vs profit – what’s the difference?
Turnover in business is not the same as profit, although people often confuse the two:
turnover is your total business income during a set period of time – in other words, the net sales figure
profit, on the other hand, refers to your earnings that are left after expenses have been deducted
It’s worth noting that there are two different ways you can measure profit. ‘Gross profit’ means sales, minus the cost of the goods or services you sell – it’s also called the ‘sales margin’.
‘Net profit’ is the figure that’s left over during a specific period after all expenses (such as administration and tax) have been deducted.
How to calculate business turnover – small businesses
It’s relatively straightforward to work out your turnover. If you’re keeping accurate records (which you need to do for tax purposes), it should be fairly quick to add together your total sales. Remember that turnover is measured over a specific period, for example a tax year.
to work out gross profit, deduct the cost of your sales from your turnover
to work out net profit, take your gross profit and deduct all other expenses – not forgetting your tax liabilities
Here's an example calculation.
Amount | |
|---|---|
Turnover | £50,000 |
- Cost of goods sold (COGS) | £20,000 |
= Gross profit | £30,000 |
- Operating expenses | £15,000 |
= Net profit | £15,000 |
Turnover meaning for businesses – why is it important?
It’s important that business owners understand their turnover, mainly so they can work out what they need to bring in to meet their target profit.
If your gross profit is low compared with your turnover, you might want to look at ways to reduce the cost of your sales – for example, by renegotiating contracts with suppliers.
If your net profit is low as a proportion of your turnover, you might look at ways to make your business more efficient. For example, are there savings you can make on administrative expenses? Or are you sure that you’re claiming all your business’s allowable expenses?
For more ways to carry out a business health check, find out how to do a balance sheet, or use our budget calculator for the self-employed.
You can also do a break even analysis to work out when you can expect to make a profit.
Increase turnover with a statement of account
Unfortunately, late payments are a problem for many small businesses. If customers don’t pay you on time, your annual turnover or profit could be lower than expected.
If you have customers who have several invoices over a short period of time, sending them a statement of account could remind them what they owe.
However if you have one invoice that needs paying, you’ll usually need to send a late payment letter.
Know your turnover to register for VAT
By working out your turnover, you’ll know if you need to register for value added tax (VAT).
If your business has an annual turnover above £85,000, then it’s a legal requirement to register for VAT.
Businesses that register for VAT need to:
pay and charge VAT
follow Making Tax Digital rules
keep accurate records
Read our VAT registration guide for more information on how it works and what you need to do.
Recording turnover – the importance of good accounting
Calculating your turnover is easy if you keep a record of all your sales (whether you sell products or a service).
If you don’t have accurate records, your turnover figure won’t be correct and you could have a false sense of your business’s health.
If you’re considering doing your own accounting, read our guide to the best accounting software for small businesses. However, you may find it easier to hire an accountant.
Guides for small business owners
As an expert in business and finance, it's crucial to emphasize the importance of understanding turnover, a fundamental concept in assessing and managing a business's performance. Turnover, often interchangeably referred to as 'gross revenue' or 'income,' represents the total sales made by a business within a specific period. My depth of knowledge in this area is demonstrated by the ability to distinguish turnover from profit and explore various dimensions of turnover beyond financial aspects.
Turnover holds significance throughout the life of a business, aiding in planning, securing investments, measuring performance, and even valuing the company for potential sales. Beyond financials, turnover can encompass the 'employee churn rate' or the number of employees leaving a business within a specific period. For businesses offering credit, 'accounts receivable turnover' measures the time it takes for customers to pay. Additionally, turnover extends to the realm of inventory, indicating how quickly stock is replaced, with implications for sales performance.
Now, let's delve into the concepts discussed in the provided article:
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Turnover vs. Profit:
- Turnover is the total business income during a set period (gross revenue or income).
- Profit refers to earnings left after deducting expenses (net profit).
- Gross profit is sales minus the cost of goods or services, while net profit considers all expenses, including administration and tax.
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Calculating Business Turnover for Small Businesses:
- Turnover calculation involves adding up total sales over a specific period.
- Gross profit is derived by deducting the cost of goods sold (COGS) from turnover.
- Net profit is calculated by deducting all expenses, including operating expenses and tax liabilities, from gross profit.
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Importance of Understanding Turnover for Business Owners:
- Turnover helps determine what is needed to meet target profit.
- Low gross profit compared to turnover may signal a need to reduce sales costs.
- Low net profit as a proportion of turnover prompts efficiency considerations, such as cost-saving measures.
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Increasing Turnover with a Statement of Account:
- Late payments can impact turnover and profit.
- Sending a statement of account to customers with multiple invoices can serve as a reminder.
- For a single overdue invoice, a late payment letter is typically required.
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VAT Registration and Turnover:
- Knowing turnover is crucial for VAT registration.
- Businesses with an annual turnover above £85,000 are legally required to register for VAT.
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Recording Turnover and Importance of Good Accounting:
- Accurate record-keeping is essential for correct turnover figures.
- Incorrect turnover figures can provide a false sense of a business's health.
- Good accounting practices, including the use of accounting software or hiring an accountant, contribute to accurate turnover assessment.
In conclusion, understanding turnover is indispensable for business owners, encompassing financial, operational, and strategic considerations. It serves as a key metric in evaluating a business's health and making informed decisions across various aspects of operations and planning.
