When running a business, there are a number of important phrases and processes that are vital for you to understand. One of these is ‘business turnover’.
Although often confused with profits, business turnover is a different measure of a business’s success.
If you’re new to running your own business or perhaps you’re studying business at school, you may not know what this refers to just yet.
Learn here what business turnover is and why it is one of the most important terms to understand.
What Is Business Turnover?
Turnover is also referred to as ‘net sales’ and is the total figure of a company’s sales over a certain time period such as a tax year.
Another way to look at this is to look at everything that’s come into the business, minus any discounts or VAT charges, before expenses and the like have been accounted for.
This figure is different from the businesses profits, which take other figures and expenses into account.
Profit Vs. Turnover
As mentioned, turnover is the total sum of the sales made over a given period. Profits on the other hand are something different.
The profits are the total amount of money earned when all expenses have been deducted. Expenses can be anything from materials and labor to taxes and salaries.
If a business makes $100,000 in sales but has a figure of $60,000 in expenses for a year, the profits would be $40,000. This sum usually goes to the owners of the business.
There are two different ways to measure profit, one is referred to as ‘gross profit’ and is the sum of the total sales minus the cost of the goods or services a business sells.
‘Net profit’ on the other hand, is the final figure after all the other expenses have been deducted.
- Cost of goods sold = gross profit
- Operating expenses = net profit
As a result, the net profit is the final figure that will indicate how successful the business has been over a time period.
As a general rule, a 5% profit margin is considered to be low whereas a 20% profit margin is considered to be high.
These will vary depending on the industry and the current financial climate.
Sales Vs. Turnover
Sales and turnover are terms that are often thought of as meaning the same thing.
Although turnover includes sales, it also accounts for any returns, discounts, or allowances that must also be accounted for.
When we refer to sales in business terms, we often mean the actual sales that have gone through from customers.
No other factors or allowances are taken into consideration at this point.
How To Calculate Business Turnover?
Calculating a business’s turnover is a simple and easy process.
Companies are required to keep accurate records of sales coming from their goods and services, the total of these over the year is the turnover.
As long as the accounting department or accountant of a business has all the necessary records they need for a tax year, the turnover can be easily calculated using a variety of different computer programs.
- Turnover = total sales – returns – discounts – allowances
Is Turnover Important?
Any business needs to monitor its performance. Collecting data for your business allows you to analyze what you’re doing right and examine any areas that need improvement.
With turnover, you can measure the figures against previous years to identify if the business is growing and you’re hitting the sales targets you’d hope to be achieving at a certain time point.
Comparing the turnover figures against other data such as gross profits allows you to see if there are areas where you can save money.
For example, if your turnover was $100,000 but your gross profit was $10,000 this means that your outgoings are costing you a significant amount of money and it’s time to reevaluate sales costs or any other area of your business that you think is eating into your profits.
Recording Your Turnover
As indicated above, keeping accurate records of your business’s sales, expenses, and other financial information is essential for an accountant to do their jobs.
Having accurate information regarding your business’s turnover is important to identify the health of the business.
This is also essential information required when applying for a loan or if you’re deciding to sell the business.
Using a general ledger system is a great way to log all the activity of your sales for a specific accounting period.
This can be done by hand or using basic computer software such as Google Sheets. However, this will depend on the size of your business.
Larger businesses are more likely to have automated software that allows them to see these figures easily with pre-made reports.
The Bottom Line
When it comes to business, there are many figures you need to be aware of and monitor. This includes turnover, which is the total number of sales seen by a business over a specific period.
Turnover can be easily calculated and reported on, but if you want to leave it to a professional then hiring an accountant is the safest option.
Frequently Asked Questions
Which Is More Important: Profit Or Turnover?
One is not more important than the other when it comes to these two terms as they both indicate different things.
They are both equally important when it comes to understanding how the business is doing financially.
Turnover indicates how well the business is doing in terms of sales whereas profits indicate the costs of running a business which can inform and influence strategies in the future.