What Is Turnover In Business?
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Are you familiar with terminologies in business? Do you know- what is turnover in business? And how is it linked to your business?
Understanding business is not natural science; however, knowing business turnover can give you a good idea of how your respective market is doing, and it can be a marker that you can utilize for rIt is also referredunning your business.
Measuring turnover can assist you in securing investment if you are starting, and you can also value your company.
Business turnover can be a functional scale to measure success. However, people misunderstand it with profit. This article will guide you on what business turnover is- in a simple, easy-to-understand way.
So, make certain to read the entire article till the end.
Turnover is defined as the full scale at a particular time and it is also concerned with “gross revenue” or “income”. And this is different from profit-which is a measure of earnings.
Turnover is an essential standard for your business performance. Knowing your turnover business will be helpful throughout the entire life of your business- from planning and securing investment, measuring performance to valuing your company if you plan to sell your company.
There are also many other definitions of turnover. For example- it also means the number of employees that leaves a business within a specific time, also known as “churn”.
Or, if you provide credit to a customer, you will measure “accounts receivable turnover”- the length of the total time it takes for a client to pay.
If you notice, the turnover mentioned above is not directly related to your finance. However, we will only discuss turnover pertaining to your business income.
What Is Turnover?
Turnover can be understood as the total amount of money the business receives during goods and services over a specific amount of time. The calculation of turnover will not deduct things like discounts and VAT.
The specific amount of time it considers can be a quarter year, half-year, an entire year, or an end of a financial year.
In context to business, it is an indicator of business performance, through which you can understand how healthy your business is.
Importance Of Business Turnover
One can compare the current turnover to other times in a year or several years by measuring turnover for a certain period. This will show whether the business turnover is growing and reaching your targets.
When you compare business turnover with profit, it will also show you if you have to assess business areas where you can save money, such as the cost of your goods to sell or the cost of your business expenses.
Because if your gross profit is less than your turnover, you might have to look at the methods to reduce the cost of your sales- like are there any savings that you can achieve on the administrative level.
Difference Between Turnover & Profit
As I said earlier, Turnover in Business is not similar to profit in business, although people often get confused among these two-
Turnover is your total business income during a specific time; it is a net sales figure.
On the other side, profit is the earnings that remain after deducting all expenses.
There are two ways to calculate profit, “gross profit”- means sales minus the expenses of goods and services you sell. It’s also known as “sales margin”.
“Net profit” is the amount that’s leftover during a specific time after all costs (administration and tax) have been deducted.
How To Calculate Business Turnover?
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If your business sells products, the turnover will be the total number of sales from selling products. And, if you sell services, like consultation or labor, the turnover will be the total amount you have charged for these kinds of services.
Things get interesting when you have to calculate your gross and net profit. Because by doing this, you can see if you are spending too much on the goods to sell or your administrative expenses.
Let’s understand this with an example-
Consider your turnover for this year is £100,000.
And turnover for the last over was £80,000, the gross profit was £70,000, and the net profit was £ 65,000.
Great right! Your turnover is higher than last year. Now, let’s add this year’s profit to this mix-
- Cost of goods sold= £30,000
- Operating expenses= £ 15,000
Here, Gross profit = turnover minus cost of goods sold
Thus, in the case of the above example-
£100,000 – £30,000 = £70,000 is your gross profit
Net profit = gross profit minus expenses
So, it would be,
£70,000 – £15,000 = £55,000 is your net profit.
In the above example, the gross profit is similar to last year, but your net profit is lower. This can be an indication that your operating expenses have increased.
To reduce this, you can audit some of your administrative costs or check if there are no mistakes in your tax.
If the gross profit is lower, it is an indication that you need to cut down on the costs of your goods sold. For this issue, you can talk with your supplier for a discount or can search for a cheaper product or supplier.
Thus, it is relatively easy to work out your turnover. If your company keeps accurate records (even for tax purposes), it will quickly add together the total sales. Remember that a turnover is calculated over a specific time, like for a tax year.
In the end, most of the businesses, either large or small, will be asked about their turnover by several people, from the investors to the insurers.
Like if you began building a business insurance quote anywhere, they will ask about your annual turnover so that they can work out the right level of cover for you.
And thus, it becomes essential to keep the right track of the sales in your business, and through this, you can also predict the future of your business.