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Whether you're a business owner, a freelancer or self-employed, turnover is one of the most important financial figures to get to grips with.
This back-to-basics guide will help you understand what turnover is, when you might use it and how to calculate it. All in just 3 minutes.
What is turnover?
The Companies Act 2006 defines turnover as:
the amounts derived from the provision of goods and services falling within the company's ordinary activities, after deduction of (a) trade discounts (b) value added tax, and (c) any other taxes based on the amounts so derived.
Put simply, turnover is the total amount of money your business receives from the sale of goods and services – minus discounts and VAT.
Turnover is calculated over a specific period of time, usually a quarter or financial year. And because it only considers income generated through your main trading activities, turnover doesn't take into account things like bank interest or money received from the sale of assets.
Financial turnover vs employee turnover
The word turnover is typically used in a financial context, but you might also hear it used in other ways.
One of the most common alternative uses is employee turnover, which is also known as staff turnover or labour turnover. Employee turnover refers to the number of employees that leave the company over a given time period.
How do you calculate turnover of a company?
Calculating your turnover should be super easy as long as you've kept an accurate record of your sales.
If you sell products, your turnover will be the total sales value of the products you've sold. If you provide services, such as consulting or labour, your turnover will be the total that you charged for these services.
If you're VAT-registered, make sure you exclude VAT when calculating turnover, as this sales tax technically belongs to HMRC rather than your business.
What’s the difference between turnover and profit?
It’s important to note that turnover isn’t the same as profit. While both turnover and profit look at your total sales, profit also includes some important deductions that aren’t considered when measuring turnover.
Gross profit is your total sales minus the cost of goods or services sold (COGS), while net profit is sales minus COGS and expenses such as taxes and wages.
When will I need to know my turnover?
Pretty much every business – large and small – will need to provide their turnover at some point or another.
For instance, if you start building a business insurance quote with Superscript, we’ll ask you for your annual turnover so we can work out the right level of cover for you.
You may also need to provide your turnover if you're applying for a small business grant or loan, looking for funding or filing a tax return.
Why is business turnover important?
Turnover can provide useful information about your business and its finances. For example, comparing turnover from different periods can give an idea of whether your business is growing, while comparing turnover and gross profit can help you decide whether you need to cut your cost of sales.
However, turnover in itself is not a measure of success, as it doesn’t provide any information about profitability.
Things start to get more interesting – and insightful – when turnover is used as part of accounting formulas like gross profit margin or net income. To see this in practice, check out our calculator below...
Accounting formula calculator
Now you've mastered turnover, dig deeper into your company's finances by calculating cost of goods sold, gross profit margin, net income, break-even point and ROI.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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