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Business turnover: what is it and why it is important?

When you’re running a business there are dozens of pieces of jargon to pick through, metrics to measure and considerations to make every single day. Together, they all go some way towards helping you understand in real terms how your business is doing. Turnover is perhaps one of the most important and easy-to-read metrics to consider, but it is also perhaps one of the most misunderstood.

What is business turnover?

Also referred to as simply “income” or “gross revenue,” business turnover is the complete sum of sales made over a given period. Whereas profit measures overall earnings, turnover measures everything that’s actually coming into your business on the top line before expenses have been deducted.

Why is turnover important?

It could be argued that turnover only tells a part of the story and that net profit is the best way to measure financial success accurately, as it takes into account not only the cost of goods and services but other expenses like tax and administration fees. However, as a flat figure to work from, turnover is incredibly important, not only when it comes to working out how to meet profit goals but when it comes to courting investors too.

It’s also a great figure to compare against other metrics. For example, if your gross profit is low in comparison to your turnover then it might be time to examine ways to lower your sales costs. If, on the other hand, your net profit is low in comparison to your turnover, you should look at making your business more financially efficient.

What is turnover in business?

Turnover doesn’t just take into account the cost of a product or service (minus any VAT, of course) but any expenses paid for by the customer too, which includes shipping expenses. Turnover should also be calculated before detracting fees or commissions. This is important as you will need your exact turnover figure for your tax return and when you register for VAT. Because if you’ve miscalculated your turnover, you might think you don’t need to register when you actually do and that could land you in legal hot water. 

Also, note that turnover needs to be provided from the moment you make the sale, not the moment you send the invoice or receive payment. This is something that often catches out smaller businesses. 

Are there other types of turnover?

Turnover is a common word used not only to refer to sales, but also to a turnover of staff. This is another very important figure to keep track of (particularly in bigger companies), but it’s important not to confuse the two types of turnover for obvious reasons.

How to calculate turnover

As long as your accounting department is keeping precise and accurate records then calculating turnover is as simple as adding together all of your total sales for a given period. Generally, however, turnover is measured by the year. You can then use your turnover as a base figure from which to calculate gross profit (by deducting the cost of goods sold) and net profit (by then deducting all operating expenses).

Of course, turnover by itself is not a measure of success. Every business will make sales but the turnover doesn’t really dictate the success of the business, rather the size of it. But it can be used to measure success when compared with other metrics, and it is a valuable indication in and of itself as to how well a business is growing. 

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If you’re interested in learning more about turnover, or any other aspect of business finance, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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