What is turnover in business? How do you calculate it? And why does it matter?
If you run your own business (or you’re thinking about starting one), the meaning of turnover might be turning over in your mind. Well, we’re here to help.
We’ve got the answers to all your questions (and more) below. Let’s dive in.
Business turnover meaning: What is turnover in simple terms?
The official definition of business turnover can be found in Section 474 of the Companies Act 2006, which states that:
“turnover”, in relation to a company, means 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.
In simple terms, turnover is the total amount of money your business makes from sales over a set period (minus discounts and tax). It’s usually tracked monthly, quarterly, or annually.
Alternatively, turnover in business can also refer to “employee turnover rate,” which is the number of employees who leave your business within a certain timeframe. We dig into this second meaning in more detail below.
So, is turnover the same as income?
Yes, turnover is the same as income. It’s also referred to as “gross revenue.” It’s everything your business makes from sales before those deductions mentioned above.
Is turnover before or after tax?
Turnover is calculated after tax. Specifically value-added tax (VAT).
If you’re VAT-registered, make sure you don’t include that extra 20% you’ve charged on top of your sales prices as part of your turnover. If you do, you could end up miscalculating your business income and paying too much in tax.
Is turnover the same as profit?
No, turnover is not the same as profit.
As we’ve discovered, turnover is your total amount of sales excluding VAT and trade discounts.
Profit, on the other hand, is how much your business has earned after deducting certain costs and operating expenses.
There are two types of profit: gross profit and net profit.
- Gross profit is the amount of money your business makes after deducting the cost of goods or services (COGS). COGS includes all costs directly involved in producing a product or delivering a service, such as labour, materials, and shipping.
- Net profit is sales minus COGS and all other operating expenses such as wages, tax, rent, utility bills, and admin costs.
How do I calculate my turnover?
So long as you’ve kept accurate and up-to-date records, calculating your turnover is super easy:
- If your business sells products, simply add together the total number of sales from products sold over a year to get your annual turnover.
- Similarly, if your business provides services, your annual turnover is the total amount of money you’ve charged for those services over the past 12 months.
Why do I need to know my business turnover?
There are several reasons why you might need to know your business turnover at any given time:
- Once you’ve measured your income, you can compare different periods (month to month or year on year, for example) to see if your sales are growing or shrinking.
- You can also compare your turnover to your gross profit or net profit to understand underlying business issues. For example, if gross profit is low compared to business turnover, your sales costs might be too high. Or if net profit is low, you may need to cut operating expenses.
- Meanwhile, if you need to apply for a small business loan or grant, pursue external funding from investors, or file a tax return, you’ll need your turnover to complete an accurate picture of business performance.
- And if you purchase business insurance, you may be asked for your annual turnover to make sure you get the right type and level of cover for your business.
Financial turnover vs employee turnover: what’s the difference?
So far, we’ve explained turnover in terms of business finances. However, you might also hear it used to refer to “employee turnover”.
Also known as “labour turnover” or “staff turnover,” employee turnover is a simple calculation that helps you track how many employees have left your company over a particular period.
You can work out your employee turnover rate by dividing the number of employees who’ve left by your average number of employees, before multiplying that number by 100.
For example, let’s say you’ve lost 5 employees over the past 12 months, and you have an average number of 50 employees.
That means your employee turnover for the year would be: 5/50 x 100 = 10%.
What can employee turnover tell you?
While a high financial turnover might suggest your company is growing in the right direction, a high employee turnover could be cause for concern. If you’re consistently losing staff, you may have issues with training, morale, or work/life balance in your organisation.
On the other hand, a low employee turnover suggests your staff enjoy their work, are well paid and aren’t looking to move on anytime soon.
Glossary: Other business terms you might need to know
Turnover is the tip of the business jargon iceberg. Here are a few more terms to remember:
- Accounts payable: The money your company owes other people or businesses.
- Accounts receivable: The money that other people or businesses owe your company for the products or services you’ve delivered.
- Asset: Something of value that’s owned by your business. This might include the money in your business bank account, your stock, or your equipment.
- Break-even point: The point when your sales cover your costs. You can calculate your break-even point by the amount of money you need to make from sales or the number of products you need to sell.
- Cash flow: The total amount of cash flowing in and out of your business.
- ERN: This stands for “Employee Reference Number,” a unique number used by HMRC to identify your company. Read more here: What is your ERN? Everything You Need to Know
- Fixed assets: Long-term assets that can’t be quickly or easily converted into cash. These can include equipment or property, for example.
- Invoice: A bill you send to your customers when you sell a product or service. You may also receive an invoice when you purchase a product or service from a supplier or contractor. Learn how to write an invoice here.
- Operating expenses: The ongoing costs of running a business. Operating expenses include wages, rent, and utilities.
- Public Liability Insurance: Covers you for claims made against your business by clients, contractors, or members of the public for accidental injury or damage. If you employ staff, Public Liability Insurance is compulsory. Learn more here.
- Professional Indemnity Insurance: Specialist business insurance that covers businesses against clients making claims resulting from errors, omissions or acts of negligence by the business’s owners, directors or employees. Find out more here.
In summary: What does business turnover mean?
To recap, turnover is the total amount of money your business makes from sales (minus trade discounts and VAT). It’s the same as income, and sometimes goes by “gross revenue.”
You can calculate your annual turnover by simply adding together the total number of sales you’ve made from products sold or services provided over the past 12 months.
Getting to grips with your business turnover can help you gauge business performance over time. For example, if your income is up year on year, it’s a good indication that your business is moving in the right direction.
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