What is turnover in business – and how does it relate to your business’s health?
Understanding how well your business is doing might not be an exact science, but business turnover is one of the markers you can use to get a good idea.
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But while business turnover is a useful measure of success, 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.
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.
Our article only discusses turnover as it relates to your business income.
Turnover in business is not the same as profit, although people often confuse the two:
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.
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.
Here's an example calculation.
|- Cost of goods sold (COGS)||£20,000|
|= Gross profit||£30,000|
|- Operating expenses||£15,000|
|= 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 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?
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22 June 2020 • 9-minute read
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