What is turnover?
When you are running a business there are so many process and piece on jargon to get used to. Turnover is an important one of them. Learning and understanding these processes can ensure your business can run as smoothly as possible.
Key takeaways
Turnover represents the total income a business generates from its core activities over a specific period, calculated before any expenses are deducted
You can calculate the turnover of a business by summing up sales income over a specific period, and then subtracting discounts and VAT
Turnover is a crucial metric because it helps calculate whether you should be VAT registered as well as indicating financial health and influencing insurance costs
What is turnover?
Turnover is the total amount of income a company generates from its core activities over a specific period of time. It is essentially the money that comes into the business before any expenses are deducted. This is the same for both service-based businesses as well as product-based businesses. It is also referred to as gross revenue or gross income.
How do you calculate the turnover of a business?
To calculate the turnover of a business, you should sum up all the sales income over a specific period, and then minus discounts and VAT.
The timeframe is usually a tax year, or a financial quarter, depending on a company’s accounting practices.
Does turnover include expenses?
No, turnover does not take expenses into account. This is because it is the total income of a business before expenses are subtracted. It is important that turnover is only how much income the business has generated without any expenses deducted from that number.
Is turnover calculated before or after tax?
Turnover is calculated after VAT is deducted from income. VAT is not considered part of your business income. In order to get an accurate picture of the turnover of your business you need to exclude VAT from your sales total. Your gross profit/turnover does not include other tax liabilities.
What’s the difference between turnover and profit?
Turnover and profit are not the same thing.
Turnover is the total amount of money your company generates. It does not include expenses, but simply represents your total sales income
Profit includes all expenses (which are subtracted) and it represents your residual earnings after all expenses (including tax liabilities) have been charged
You can work out gross profit and net profit using the following calculations:
Turnover - cost of goods sold = gross profit
Gross profit - operating expenses = net profit
An example is as follows:
Calculation | Amount | |
Turnover | £50,000 | |
Cost of goods sold (COGS) | £20,000 | |
Gross profit | Turnover- COGS | £30,000 |
Operating expenses | £15,000 | |
Net profit | Gross profit - Operating expenses | £15,000 |
So, in the above example, turnover is £50,000. Gross profit is £30,000. Net profit is £15,000.
Is turnover the same as income?
Turnover is not necessarily the same as income. Although turnover and income can refer to the same concept – specifically the total sales made by a business in a given period – turnover does not include other sources of income like interest or investments. It focuses solely on revenue generated from business activities, such as the sale of goods or services.
Why is turnover important?
Turnover is a crucial metric for several reasons including:
If your turnover is over £90,000 you’re required to register for VAT. It’s therefore necessary to know if your turnover exceeds £90,000 in order to understand if your business should be VAT registered.
Turnover measures your total sales revenue over a specific period, and so helps you to understand how well your business is performing and growing. A company that has heavily invested in a particular time-period might experience low profits, but high turnover. In this scenario, turnover might be a better indication than profit of how well the business is performing.
When applying for a loan, lenders will ask about business turnover. This is because turnover is an important indication of financial health, and helps a lender assess your ability to repay the loan.
Insurers use turnover as one of several measures which help them assess risk. A high turnover indicates a company that works with many clients, has a large volume of transactions, or deals with expensive contracts. These are all factors which increase risk. It’s therefore important to be honest with your insurer about turnover. You can compare business insurance to find the best deals for a company with your specific turnover and requirements.
VAT registration
Maintaining accurate accounts and indicating financial health
Loan applications
Business insurance costs
What does HMRC mean by turnover?
HMRC defines turnover as the total amount of money a business receives from the sale of goods and services, minus discounts and VAT. It is used to assess whether a business should be registered for VAT.
Is my turnover my income?
Turnover and income can refer to the same concept, specifically the total sales made by a business in a given period. However, turnover does not include other sources of income like interest or investments. It focuses solely on revenue generated from business activities, such as the sale of goods or services.
