In business, turnover usually refers to the amount of money you receive from sales. It’s often used interchangeably with total sales, gross revenue or income. If you provide a service, rather than goods, your turnover will be the amount that you charge for this service. Broadly speaking, it gives you an idea of how much you’re selling over a given period or how much business you’re ‘doing’. However, it’s not an indication of how well a business is performing or how profitable it is, as the figure doesn’t take into account any costs or expenses.
How to calculate turnover
Calculating your business turnover is simply a matter of adding up all of your sales over a given period and deducting any trade discounts and VAT.
What’s the difference between turnover and profit?
It’s easy to fall into the trap of thinking that turnover is the same as profit, given that both are key accounting terms that refer to sales in some way. However, they aren’t the same and are used to indicate very different accounting concepts:
- Turnover = total amount of sales (minus VAT)
- Gross profit = turnover minus cost of the sales (such as how much you paid for the goods, sales commissions and delivery fees)
- Net profit = gross profit minus other expenses (such as salaries and tax)
Turnover isn’t an indicator of how profitable or lucrative a business is. For example, a company could have a very high turnover figure but a very low profit, having spent a lot on buying raw materials and salaries.
Why is turnover important?
Knowing your business’s turnover and, subsequently, how much profit it makes is important as it can help you plan and make financial decisions. For example, if turnover is high but gross profit is very low, this could be an indication that you’re paying too much for your goods or not charging enough when you sell. And if your net profit is even lower, you may want to reassess how much you are paying your workforce or whether you have too many employees on the books. For example, if your turnover is £2,000 per month, but your net profit is only £100, investors can see that profit margins are slim and may infer that your business isn’t running efficiently.
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What are the other types of turnover?
While ‘turnover’ may generally be used to refer to a business’s total sales, it can also be considered an umbrella term. This umbrella encompasses a number of different types of turnover that can be calculated to better understand business efficiency and performance. Here are some common examples.
Inventory turnover
Inventory turnover, also known as turnover rate, measures how long it takes your business to sell its inventory. To do this, you need two figures:
- total sales
- average inventory
The period of time for these figures is up to you, but inventory turnover is typically calculated on a monthly basis.
Dividing the total sales by the average inventory gives you your turnover. For example, if your business makes £10,000 in sales in one month, and your average inventory is £1,000, your turnover rate will be 10. This means that you turn over your inventory 10 times each month.
Employee turnover
Employee, or ‘staff’ turnover measures the rate at which employees leave a business. To calculate this, you’ll need the following figures:
- total number of employees who have left
- the average number of permanent employees
Dividing the total number of employees to have left by the average number of permanent employees in the same period gives you your employee turnover.
For example, if you typically have 100 employees and 10 leave, your turnover rate would be 10%.
Generally, the lower your employee turnover the better, as this indicates that your employees are satisfied with their jobs.
If you want to dig even deeper, there are additional turnover calculations that can be used to gain further insights into the efficiency of specific business areas. These include accounts receivable and accounts payable turnover, which measure how long it takes your business to receive funds from customers and pay out to debtors, and asset turnover, which measures how well your business generates revenue from its assets.
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