Turnover and profit are the most commonly used words in the business world. But what do they indicate? How they are different? How to calculate them? What if someone tells you that your business has a low turnover and your profit is shrinking? And how to boost your earnings using these metrics? Read on this post to find out all about turnover vs profit.
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Let’s kick off with what is business turnover!
What is a Business Turnover?
To put it simply, turnover is the revenue generated by the total sales of a business in a specific period. Sometimes, it is also called income or gross revenue. It is one of the important metrics to know the performance of your business. Measuring the turnover and getting the exact turnover value is crucial throughout your business life. The turnover provides reliable information for securing investment by measuring the performance of your business. In addition, it helps to know the value of your business to sell it.
Along with this, turnover has some other meanings too that don’t refer directly to finances. Like it refers to the rate at which assets or inventory of the business ‘turn over’ that means they have been sold or exceeded their productive life. Moreover, it also indicates the rate at which business employees leave within a specific period. However, in this blog, we’ll only look at the definition of turnover on financial grounds.
How to Calculate Business Turnover?
Calculating your business turnover can be an exciting experience for you. There are two accounting methods to work out a turnover in the UK: simplified cash basis accounting and traditional accounting.
In the first process, turnover refers to the money that enters the business in a financial year, less the money earned but not received in that period. The latter method – traditional accounting – turnover is all the sales revenue generated by a company in a financial year. It also includes those payments that are not yet paid.
What is a Business Profit?
Profit is the remaining amount a business gets after deducting all the expenses against net sales. To calculate profit, you just need to deduct expenses from the sales you made. The expenses that need to be subtracted depends on the profit type you want to work out. These types are:
- Gross Profit – It is measured by deducting the cost of goods sold (COGS) from the total sales.
- Operating Proft – If you deduct operating expenses from the cost of goods sold, you’ll get operating profit.
- Net Profit: Net profit is calculated by subtracting total expenses, including taxes and interest from the gross profit.
Turnover vs Profit – Differences
Turnover is the total business income earned in a specific period like in a month, quarter or year. It is more about total sales that can be earned from a single stream of revenue or more. Turnover shows the demand for a product or service in a market.
Whereas, profit is the earnings a company gets after deducting all the expenses. The profit shows the health of a business by getting residual earnings after deducting all sorts of expenses. A business needs to charge enough price on its products and services to earn more residual earnings for distributing it to the shareholders.
Quick Sum Up
To sum up, you have got the basic difference between turnover vs profit, how they are different and how they are the important metrics for your business. Business owners need to have a deep understanding of their turnover for using it to maximise their profit. Bear in mind that if your gross profit is lower than your turnover, you need to figure out ways to reduce the cost of the products. On the other hand, if the net profit is less than your turnover, you need to work on your business for making it more efficient. Along with these, there are many ways to measure the health of your business.
Disclaimer: This blog is written for general information on turnover vs profit.