As a small business owner, you can’t rely on feelings to gauge your business performance. You need reliable data. But understanding the myriad of metrics and jargon can be challenging, especially when many are so closely related.Business turnover is one such number.

Commonly confused with profit, it’s one of the key markers that can help you understand how your business is doing in real terms. And arming yourself with this knowledge could prove crucial for several reasons, from business planning to arranging finance and attracting investment.

So, how can you get to grips with the topic? Read on to find out:

What is turnover in business?

In short, company turnover is the total amount of money your business receives in sales of goods or services over a specified period, excluding VAT. It’s sometimes referred to as ‘gross revenue’ or ‘income’.

You could track annual sales turnover, for example, or quarterly, half-year and end of financial year turnover. The figure includes your basic sale prices as well as other expenses you charge to customers, such as shipping fees. But it doesn’t deduct things like fees taken by online payment providers or any commission you award to sales agents.

Alternative definitions of business turnover

It’s worth noting at this point that turnover in accounting is different to turnover in other areas of business. There’s also:

• Staff turnover, otherwise known as ‘churn’, which tracks the number of employees that leave your business over a specific period.
• Asset or inventory turnover, which is the number of items you sell, discard, or that expire.
• Accounts receivable turnover, which tracks the length of time between giving credit to customers or clients and them paying up.

These types of turnover can all be important in their own ways. Here, we’ll stick to focusing on turnover relating to your business income.

What’s the difference between business turnover and profit?

It’s common to confuse the two, and company turnover is actually a crucial starting point for calculating profit. But there’s a key difference.

While turnover focuses on overall sales, profit is your business’ earnings after taking away expenses. Depending on which of the two types of profit you’re calculating, this could mean deducting the material and labour cost of producing goods, also known as cost of goods sold (COGS), as well as general operating expenses like rent, wages and tax.

• Gross profit is your turnover minus the costs that go into your goods or services, also known as sales margin.
• Net profit is your turnover minus these costs and all your other operating expenses.

Why is business turnover important?

As you read above, turnover is important for calculating profit. Knowing the relationship between the two can be useful for a couple of reasons relating to how you run your business.

If your gross profit is low compared to your turnover, for example, this suggests you should try to improve your sales margin by reducing the cost of your goods or services. One way to do this might be negotiating better deals with your suppliers.

Alternatively, if your net profit is low compared to your turnover, you might want to reduce operating costs. Minimising spend on utilities or office space are two ways to potentially improve business efficiency, as well as claiming all the allowances you’re entitled to.

Comparing your turnover across multiple periods is a good way to judge whether it’s growing, which is handy if you’ve set quarterly or annual sales targets.

When is business turnover not so important?

Turnover alone can’t tell you the full story of your business’ performance.

Without knowing your gross and net profit, you could see record sales quarter after quarter and think everything is going well. But if either your COGS or operating expenses increase in that time too, or if they’re too high to start with, your business won’t see the benefit on its bottom line.

Ultimately, profit is what you need for your business to survive and grow long term. But turnover is still a fundamental part of that, as you can’t achieve profit without making sales.

How to calculate your business turnover

Now you know what business turnover means, you can learn how to calculate it. Thankfully, this should be relatively easy as long as you’re keeping accurate sales records (which is important for tax as well as planning and forecasting).

• For products, your turnover is the total value of your sales over the period you want to look at.
• For services like consulting or labour, your turnover is the total you’ve charged for them.

Bear in mind that traditional accounting calculates turnover at the point when you provide your goods or services. This is separate to when you send out an invoice or when your customer actually pays you.

If you use what’s called ‘simplified cash basis accounting’, your company turnover only includes money you receive in that period. In this case, if you provided a service with long payment terms or your customer delays payment, you wouldn’t include that sale in your turnover until the money comes in.

Here’s an example of how you might use turnover to calculate profit.

If you’re still a little confused about how to calculate your turnover – or simply don’t have the time to work it out on a monthly and yearly basis, don’t worry! Once you sign up to Pulse, we’ll send you a monthly snapshot of your business’s finances, with information on your gross margin, P&L and yes, even your turnover trends!

Turnover and VAT

Knowing how to work out your business turnover is also important for seeing whether your business legally needs to register for VAT.

The current VAT threshold in the UK is £85,000. If your turnover exceeds this over any 12-month period – not just a tax or calendar year – you need to register for VAT and start charging it on sales. But you still won’t include VAT in your turnover, as you haven’t technically earned it. Instead, you’ll pay this to HMRC quarterly.

Make business finance work for you

We’re all about helping businesses harness their finances. Now you know what’s meant by turnover in business and how to calculate it, visit our blog hub for more handy business advice. For more guidance, why not get in touch with a member of the Pulse team to see how we can help you.