What is business turnover and how do you calculate it?

Superscript
04 May 2021
3 minute read

Turnover is a key indicator of a business’s performance. Calculating business turnover helps you secure investments (if you’re just starting out), value your company and see how healthy your business is.

Most businesses – large and small – will get asked what their turnover is by several people, from investors to insurers. For instance, if you start building a business insurance quote with Superscript, we’ll ask you what your annual turnover is so we can work out the right level of cover for you.

It’s important to keep an accurate track of your sales so you can easily work out what your turnover is and what your predictions are for the future.

What is turnover?

Turnover is the total amount of money your business receives as a result of the sales from your goods and/or services over a certain period of time. The calculation doesn’t deduct things like VAT or discounts, which is why it’s also referred to as ‘gross revenue’ or ‘income’.

The period of time that it considers could be a quarter year, half-year, end of calendar year or end of financial year.

In a business context, the definition of turnover can also refer to the turnover of staff, which is the number of employees that leave the business, or the turnover of inventory or assets, which means that they are either sold, thrown away or outlive their usable life.

Why is business turnover important?

By analysing turnover for a specific period, you can compare your current turnover to other times in the year or over a number of years. This shows whether your business turnover is growing and if it matches your targets.

When you compare turnover alongside profit, it could also show you if you need to assess areas of the business where you could save money, such as the cost of your goods to sell or the cost of your business operations or expenses.

What’s the difference between turnover and profit?

If turnover is referred to as gross revenue, then profit is referred to as net revenue. This is because your income is all of your sales, but your earnings will have deductions.

These deductions could be a number of things such as sales minus the cost of the goods or services sold (gross profit) or sales minus expenses, such as tax and administration (net profit).

How do you calculate turnover of a company?

Calculating your turnover should be super easy as long as you have kept an accurate record of your sales.

If you sell products, your turnover will be the total number of sales from the products sold.

If you sell services, such as consulting or labour, your turnover will be the total that you have charged for these services.

Where things get interesting is when you also calculate your gross and net profit.

This is because you can then see if you’re spending too much on your goods to sell or on your operational expenses.

Let’s demonstrate this with an example:

  • Your turnover for this year is £100,000
  • Turnover for last year was £80,000, your gross profit was £70,000 and your net profit was £65,000

Great! Your turnover is higher than last year. But let’s add this year’s profits into the mix…

  • Cost of goods sold (COGS) = £30,000
  • Operating expenses = £15,000

Gross profit = turnover minus cost of goods sold

For the above example, this is: £100,000 - £30,000 = £70,000 is your gross profit

Net profit = gross profit minus expenses

So, this would be: £70,000 - £15,000 = £55,000 is your net profit

In this example, your gross profit is the same as last year, but your net profit is lower. This could be an indication that your operating costs have increased. To reduce them, you could look at doing an audit of your administration costs or check that there are no mistakes on your tax.

If your gross profit was lower, this is an indication that you need to cut down on the costs of goods sold. For this, you could talk to your supplier about a discount, searching for a cheaper product or searching for a cheaper supplier.

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