What is ‘turnover’ and how do you calculate it?

Knowing how well your business is doing at any point in time is important for several reasons; if you want to attract new investment, arrange a loan, plan for the future, or even sell the business.

Turnover is one key indicator and profit another although the two are not to be confused.

This quick guide explains exactly what turnover is, why it matters, and how to differentiate it from profit.

Turnover definition

The official definition of turnover according to the Companies Act is stated as

…the amount derived from the provision of goods and services after deduction of trade discounts, value added tax (VAT), and any other taxed based on the amounts so derived.

In other words, think of turnover as the amount you invoice your customers for the sale of products or delivery of services, minus any discounts and VAT. You may also hear it called gross income or revenue.

Turnover includes some things you may not expect; for instance, the amount you add on for shipping an item is part of your turnover, as are any expenses you invoice customers for.

You should also calculate turnover as the total amount before taking off fees (for example, PayPal) or commission.

Why this matters is that your turnover is the number that determines when you have to register for VAT so if you’re not calculating turnover accurately, you may think you don’t have to register when in fact you are legally required to.

Something else that catches new business owners out is the fact that turnover is calculated at the point you provide services or goods and not when you send out an invoice or when you receive payment.

Income derived from an investment such as interest or a dividend is excluded from turnover, as this is not related to the goods or services the business provides.

What is the difference between turnover and profit?

Turnover

This is the total income the business generates over a specified period such as a quarter, half-year, or end-of-year. It does not include any VAT you charge your customers.

Profit

This is a measure of earnings once all costs have been deducted and for the sake of clarity, there are two ways of measuring profit: gross profit and net profit.

Gross Profit

This is the sum you’re left with after the cost of the goods or services has been subtracted, in other words, your sales margin.

Net Profit

Net profit is what you’re left with after ALL expenses, including tax, are deducted.

How to calculate your turnover and profits

Provided your accounts are up to date, you should be able to quickly work out the total sales for a specific period.

To calculate profit, simply deduct costs; for net profit, deduct all other expenses, including tax.

For example, if your turnover is £100,000 and the cost of the goods sold is £20,000, your gross profit is £80,000.

Once you take operating costs of say £10,000 into account, you’re left with a net profit of £70,000

Why knowing your turnover matters

If you know your turnover, you can compare it to profits and make informed decisions about how to run the business more efficiently.

For instance, if turnover is high but gross profit is low per item, you can try and renegotiate with your existing supplier to reduce costs or look for another supplier.

If net profit is low relative to turnover, you should look again at your admin costs and whether or not your tax arrangements are in order.

Are you claiming all the business allowances and expenses you’re entitled to?

Other types of turnover

There are several other types of turnover in the business world.

Employee turnover (churn)

You may also hear ‘turnover’ being used to refer to the number of staff that leave a company during a specific period, sometimes called ‘labour turnover’ or ‘churn’.

If your business is a happy and rewarding place to work, you would expect your turnover of staff to be low.

It’s another important metric, especially for larger companies, and is often compared with staff retention rates.

Inventory turnover

Inventory turnover refers to the amount of time it takes to shift stock. To calculate this, you need to know both your sales figures and the value of your average inventory.

Divide the sales figure by the average inventory to calculate the inventory turnover.

Accounts receivable turnover

Businesses that extend credit to clients may also use ‘accounts-receivable’ to indicate the time it takes clients to settle invoices. This is known as accounts receiveable turnover.