Woman working from bed blowing on cup of coffee | Business turnover: What is it?

Contents

  1. 1. Business turnover: What is it?
  2. 2. How to work out business turnover
  3. 3. Why is turnover important?

Business turnover: What is it?

March 8, 2023
When you’re a self-employed sole trader or small business owner, one of the most important metrics you’ll need to understand your business performance is business turnover.In this guide, we’ll look into the definition of turnover, outline how it’s used to measure business health and break down how you can calculate your own business turnover.

Business turnover: What is it?

Otherwise known as total income or gross revenue, business turnover is the total amount of money your business over a set period of time. While this is usually quarterly or across a financial year, the time period is down to you to decide.
The official definition of turnover in business under the Companies Act 2006 is as follows:

‘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.’Note: Keep in mind that there are other types of turnover, such as employee turnover. This describes the labour turnover of a company, and as a metric can be used to hone in on employee retention. In this article, however, we’ll be focusing specifically on business turnover.

What’s the difference between turnover and profit?

While turnover and profit both consider your total business income, profit measures total earnings after expenses have been deducted, whereas turnover is the business income recorded on the top line of your balance sheet.It’s also worth noting there are two different ways you can measure profit: your gross profit and net profit.Otherwise known as the sales margin, gross profit can be worked out as total sales minus the cost of goods (COGS) or services sold.Net profit, on the other hand, is sales minus COGS and all other expenses, such as tax, salaries and administrative costs.

How to work out business turnover

Turnover is the total of all the income your business has made over a given period, such as sales turnover and shipping fees.It’s important to note that VAT should not be included in your business turnover total (we’ll explain why further down), and should be calculated before deducting commission, discounts or fees.To give you an idea of what your turnover, gross profit and net profit look like, we’ve outlined an example of turnover below.

Business turnover example

Amount
Turnover£100,000
- Cost of goods sold (COGS)£55,000
= Gross profit£45,000
- Operating expenses£15,000
= Net profit£30,000
When it comes to working out your business turnover, keeping accurate records is essential. Not only will you, as a business owner, need accurate records for keeping track of your tax liabilities, but you’ll need accurate records to work out your turnover figure for the financial year.When filing a tax return or registering for VAT, you’ll need to provide your total turnover over a specific period, and without accurate records you could find yourself submitting incorrect information.To avoid any mishaps, you might find it beneficial to invest in a good accounting software to keep track of your turnover.
With Ember, not only can you keep your records up to date using our snap and capture technology, but we’ll also keep you up to speed with other important deadlines, such as registering for VAT based on your turnover total.

Why is VAT not included in turnover?

Turnover doesn’t include VAT as VAT doesn’t technically belong to your business but to the UK government. However, you need to know your exact turnover figure ensure you pay the correct amount of VAT.

Why is turnover important?

Turnover is a useful metric for understanding your business performance, and is useful at every stage of your business — from attracting investors, to measuring performance, to valuing your company if you plan to sell.Comparing turnover to gross profit can also guide you in strategic decisions, such as cutting cost of sales or reducing churn.Turnover is also important for:
    Enabling you to determine what actions you can take to meet your target profitCarrying out comparative analyses with other periods throughout the year or over a number of yearsPlanning and securing business investmentDetermining the value of a company if you’re planning to sell the businessInforming decisions that increase your profit marginKnowing if you need to register for VAT
While turnover is a very useful metric, it doesn’t provide any information about profitability and, as a result, cannot be used by itself to measure the success of your business.
Caroline Wire
Caroline WireFreelance Copywriter

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