Understanding how your business is performing financially is key to gauging its success. But with so many terms, acronyms and KPIs (key performance indicators) used to describe business finance, it’s easy to get confused. Turnover, however, is one of the easiest metrics to understand and will provide insight into whether you’re smashing your financial goals or not.
What is the definition of turnover?
Also known as income or gross revenue, turnover is the total amount of sales you make over a set period. This could be weekly, monthly, quarterly or annual turnover - whatever time period you choose to measure. Basically, it’s all the money that comes into your business before any expenses and operating costs are deducted.
It’s not to be confused with profit which measures your overall earnings and is reached by subtracting your total expenses from your total sales.
It can also refer to labour turnover or turnover rate - the number of employees which leave your business within a set period.
Why knowing your turnover helps your business
Some experts argue that knowing your net profit is a better measure of financial success than business turnover. Indeed, you can have impressive sales but also extremely high costs, meaning your profit is actually very low. But turnover can reveal more than just profit margins.
Knowing your turnover figure can help when trying to win over investors. It can also function as a guide when setting profit margins and assessing how to reach profit-related goals.
For instance, income which falls short of targets indicates poor sales. This can give you a heads up that something’s not right, as well as a chance to rectify it. Examples of where you might be going wrong include prices being too high and/or a weak marketing strategy.
Turnover vs profit
People often talk about these two things in the same breath, but they’re distinct terms and understanding the differences is essential:
Turnover definition - Your total business income over a period of time
Profit definition - Any money, also called earnings, left after all costs and expenses have been deducted. Profit is further divided into two definitions. Gross profit is the amount after the cost of goods or services has been deducted Net profit is the figure left after all other expenses have been deducted e.g. administrative costs, tax etc.
If gross profit is low compared to business turnover, you might want to look at reducing sales costs. If net profit is low, on the other hand, you may need to reduce operating expenses.
Tracking turnover in business
It’s very important you record your sales turnover from the start. This involves recording it at the time of the sale, not when an invoice is raised or cash changes hands. It must take into account any expenses a customer pays for too, such as delivery costs. Commission and fees should also not be deducted at this stage.
Does turnover include VAT?
Turnover doesn’t include VAT because technically VAT doesn’t belong to the company. You collect VAT on behalf of the UK government and pay it to HMRC. However, knowing your exact annual turnover is essential for paying the correct amount of VAT. In fact, miscalculating your sales turnover could result in you paying too much or too little VAT.
How is turnover calculated?
Turnover is calculated by adding up all business income over a set period, including all sales of goods and services.
How does turnover affect a company?
A high income can indicate a company is growing, particularly if it increases year on year. However, a high employee turnover rate can lead to poor morale, a loss of valuable experience, and impact on operations with reduced company productivity.