One of the most important measures for any company is to understand what is the turnover of the business. The turnover is the value of all the sales made over a certain period of time, it’s sometimes called gross revenue or income or the top-line (because it’s normally the first line at the top of any accounts calculations).
It’s not the only measure of how well your business is doing and you will definitely track your trading profits and cashflow, but turnover is definitely an important measure to help you understand the health of your business and you should track turnover along with profit and cash flow.
Why is turnover important?
Your business’s turnover is important for three main reasons:
- Firstly, it’s a really important measure of how your business is performing (though it needs to taken together with profit and cash flow).
- Secondly, it determines some key actions you need to take – for example, you need to register for VAT when your business’s turnover hits a certain level; some regulatory issues start to take affect, especially around employees; and the type of insurance or bank account is often linked to the business turnover.
- Thirdly, it’s a way of planning and tracking your business and understanding its growth and value if you ever want to sell your company.
Let’s get on to an explanation of what is business turnover and how to calculate it.
What is turnover?
The definition of the turnover for your business is the total confirmed sales made by the business over a certain period of time. It’s sometimes called gross revenue or income or top-line.
For example, if you own a DIY shop:
- If you provide a customer with a quote for sell them three ladders but they have not confirmed that they want to buy these from your business then this is not normally included in turnover.
- If you sell three ladders to a customer for cash, then this is included in turnover.
- If you sell three ladders to a customer and agree to provide them with an invoice that they can pay within 30 days, then this is included in turnover.
Another example, if you own a hairdresser salon:
- If you provide a hair cut for a customer and they pay with their credit card, this is normally included in turnover.
- If a customer books an appointment for a hair cut but you have not yet cut her hair, this is not included in turnover.
Non-financial turnover definitions
There are a few alternative definitions of the word turnover that refer to a business but aren’t specific to the finance side of the company. Three common alternative uses of turnover are:
- Employee turnover: the number of employees who leave and join a company (sometimes also called churn rate). High employee turnover means a lot of staff are joining and leaving your business, which might be the nature of the sector or due to other problems.
- Customer turnover – the number of regular customers you win or lost (also sometimes called customer churn rate). High customer turnover means you are winning and losing a lot of customers – it’s good you are winning new customers but bad that you are losing a lot of customers.
- Stock turnover – the time it takes to sell a particular product and have to re-stock it. High stock turnover means you sell a lot of individual items.
What’s the difference between turnover and profit?
The turnover of your business is the total sales over a particular period of time. Profit refers to how much money is left over once you deduct from the turnover the costs of running your business over the period of time.
There are two different ways of calculating profit:
- Gross profit is the turnover minus the cost of the goods or services you sell
- Net profit is the turnover minus all the costs associated with running your business
For example, if you own a DIY shop and sell ladders:
- the Gross profit is the total sales of the ladders minus the cost you had to pay to buy the ladders from the wholesaler or manufacturer.
- the Net profit is the total sales of the ladders minus the cost you had to pay to buy the ladders and also minus the rent you pay for the shop premises, the electricity bill, the rates, etc.
How to calculate business turnover for a small business
It’s straightforward to calculate your business turnover – though you will need to keep accurate records. The turnover the total sales you made over a period of time (normally over your business’s tax year). Many business owners track turnover per day, week, month and year. For larger businesses, it’s also useful to track by quarter (the total every three-months) and half year periods (the total every six-months).
To calculate your turnover, add up the sales you have made:
- include cash sales
- include invoice sales (where the date of the invoice is in the time period you’re measuring)
- also include any refunds you have had to make
- do not include the value in any quotes which have not yet been confirmed by the customer
Billings vs revenue
You might sometimes read or hear discussed the difference between billings and revenue. For most small businesses, there is no difference. However, if you sell memberships or subscriptions, then this is really important. For example, if you own a gym or publish a magazine and sell annual membership or annual subscriptions, you need to understand the impact to your turnover.
- Billings is the sales amount that is registered over a particular period of time
- Revenue is the sales amount that is ‘recognised’ over a particular period of time
It sounds like the same thing, and for most companies selling products or services, it is the same. If in one month you sell a ladder to a cash buyer for £120, then for that month your billings are £120 and your revenue is also £120.
However, if you sell something where you are taking money for a service that will be provided over a period of time (for example, an annual gym membership) then there’s a big difference. If in one month you sell an annual (12 month) gym membership to a customer for £120 then your billings for the month are £120 but your revenue is £10 for the month (you divide the price of the membership by the number of months and ‘recognise’ a portion of the total membership fee as revenue for each of the twelve months.
Calculating your gross profit
To work out your company’s gross profit, you need to calculate the cost of making or buying your goods or services (called your Cost of Sales or your Cost of Goods Sold) and take this away from your turnover. For example, if you run a DIY shop and sell a ladder, the Cost of Sales is the price you pay your wholesaler or supplier to buy your stock of ladders.
To work out your company’s net profit, you calculate all the additional expenses required to run your business and take these away from your gross profit.
If you sell products, your Cost of Goods Sold are normally the price you pay to buy in the products or to manufacture the products. If you sell services, your Cost of Sales are normally the costs to actually carry out the service you offer.
For a DIY shop:
Cost of Goods Sold is the price you pay to buy in the products you stock.
For a hairdresser:
Cost of Sales is the price you pay for the items required to wash, style, and cut hair. It is normally also the salaries you pay the hairdressers themselves.
For a florist:
Cost of Goods Sold is the price you pay a wholesaler for your stock of flowers together with the wrapping paper and other elements that make up a flower display.
Calculating your net profit for a small business
The gross profit we have just described above is important as a measure of how your business is doing against other businesses but it does not directly impact your cash. The net profit is the amount of money you have left over after you calculate your sales and deduct all expenses – this is much more important for because it normally directly reflects how successful your business is over a period of time.
Turnover limit before you have to register for VAT
In the UK, you need to register for VAT (value added tax) once your business turnover reaches or is likely to reach a certain threshold in a year. If you are tracking your turnover every month, you’ll know if and when you need to register your business for value added tax (VAT).
The threshold to register is if your business has an annual turnover above £85,000, then you have a legal requirement to register for VAT with HMRC. (You can voluntarily register for VAT if your turnover is below this, but it’s best to take advice before you do this.)
Once you have registered for VAT, you will be issued with a VAT number that’s unique to your business and you will have to add VAT to any sales. Many goods have a VAT rate of 20% (that means you need to add 20% to your prices that you then pay to HMRC). However, some types of goods and services have a VAT rate of 0%. This means you still technically charge VAT but at 0%, so no additional cost to the customer. If you run a bookshop, your books are sold with a VAT rate of 0%.
The importance of turnover and profit numbers for any small business
Your turnover and profit numbers are incredibly important as a way of understanding and improving your business. It’s also an important way of understanding how your business performance compares to other similar businesses.
For example, if your gross profit is a low percentage than other similar businesses when compared to your turnover then this indicates that might want to look at ways to reduce the cost of your sales (which might include negotiating supplier discounts or buying from a different supplier).
However, if your net profit is low when compared to other similar businesses, you might look at ways to make your business more efficient by reducing other costs in running your business. For example, could you reduce administrative costs, move to a cheaper offer or shop or cut down on other expenses?