Working out how well your business is doing might not be an exact science, but there are markers you can use to get a good idea – and business turnover is one of them.
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Business turnover is a useful measure of a business’s health, though it's often confused with profit. So how do you work it out? This article explains what business turnover is, in simple terms, and guides you through calculating it.
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.
Turnover in a business is not the same as profit, although the two are often confused.
Your 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 any expenses have been deducted.
It’s worth noting that there are two different ways profit can be measured. ‘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.
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 ‘churn’.
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.
It’s relatively straightforward to work out your turnover. If you’re keeping accurate records (which you need to do anyway for tax purposes), it should be fairly easy to add together your total sales. Remember that turnover is measured over a specific period, for example a tax year.
Here's an example calculation:
Cost of goods sold (COGS): £20,000
Operating expenses: £15,000
Gross profit: £30,000
Net profit: £15,000
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 into 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?
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20 April 2020 • 4-minute read
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