What is ‘turnover’ and how do you calculate it?

Knowing how well your business is doing at any point in time is important for a number of reasons, if you’re trying to attract new investment, arrange a loan, plan for the future, or trying to sell the business.

Turnover is one key indicator and profit another although the two are not to be confused.

Our quick guide will explain exactly what turnover is, why it matters, and how to differentiate it from profit.

Turnover definition

The official definition of turnover according to the Companies Act is stated as “the amount derived from the provision of goods and services after deduction of trade discounts, value added tax (VAT), and any other taxed based on the amounts so derived”.

In other words, think of turnover as the amount you invoice your customers for the sale of products or delivery of services, minus any discounts and VAT. You may also hear it called gross income or revenue.

Turnover includes some things you may not expect; for instance, the amount you add on for shipping an item is part of your turnover, as are any expenses you invoice customers for. You should also calculate turnover as the total amount before taking off fees (for example, PayPal) or commission.

Why this matters is that your turnover is the number that determines when you have to register for VAT so if you’re not calculating turnover accurately, you may think you don’t have to register when in fact you are legally required to.

Something else that catches new business owners out is the fact that turnover is to be calculated at the point when you provide services or goods and not when you send out an invoice or when you receive payment.

Excluded from turnover is income derived from an investment such as interest or a dividend, as this is not related to the goods or service the business provides.

So what’s the difference between turnover and profit?

Turnover is the total income the business generates over a specified period such as a quarter, half-year, or end-of-year. Profit is a measure of earnings once all costs have been deducted and for the sake of clarity, there are two ways of measuring profit: gross profit and net profit.

The first is the sum you’re left with after the cost of the goods or services has been subtracted, in other words, your sales margin. Net profit is what you’re left with after ALL expenses, including tax, are deducted.

Calculating your turnover and profits

Provided your accounts are up to date, you should be able to quickly work out the total sales for a specific period. To calculate profit, simply deduct costs; for net profit, deduct all other expenses, including tax. For example, if your turnover is £100,000 and the cost of the goods sold are £20,000, gross profit is £80,000. Once you take operating costs of say £10,000 into account, you’re left with a net profit of £70,000

Why knowing your turnover matters

By knowing your turnover you can compare it to profits and make informed decisions about how to run the business more efficiently. For instance, if turnover is high but gross profit is low per item, you can try and renegotiate with your existing supplier to reduce costs or look for another supplier. If net profit is low relative to turnover, you should look again at your admin costs and whether or not your tax arrangements are in order. Are you claiming all the business allowances you’re entitled to?

Other types of turnover

You may also hear ‘turnover’ being used to refer to the number of staff that leave a company during a specific period, sometimes called ‘labour turnover’ or ‘churn’. It’s another important metric, especially for larger companies, and will often be compared with staff retention rates. Businesses who extend credit to clients may also use ‘accounts-receivable’ to indicate the time it takes clients to settle invoices when calculating turnover.

Last updated: 5th May, 2021

Superscript no-ties business insurance - pay monthly

Tailored just for you + pay monthly. You could be covered in just 10 minutes.

Set up a limited company - packages from £12.99

Online company formation - everything you need to get started, via 1st Formations

Tide Business Bank Account - £40 welcome bonus!

Exclusive for Bytestart readers + 12 months' free transfers. Find out more.

FreeAgent Online Accounting - 55% off - ByteStart exclusive!

Brilliant software. Get 55% of your first 6 months, then 10% for life.

Related articles

  • accounting and book-keeping options small business

    Do you need an in-house accountant or bookkeeper?

    At some point in your journey as a small business, you’ll probably come across a common dilemma – you need an accountant. But what’s the best solution for your business? Should you hire an in-house…

  • online accounting software

    How to choose the best online accounting software for your business

    Small business accounting software has changed massively in recent years. Thankfully, the advent of cloud computing has consigned the days of buying book-keeping software in a box and installing it on your own computer to…

  • contractor accountants

    Top 10 tips for choosing a contractor accountant

    If you do a quick Google search for the term “contractor accountant”, you may be surprised to see just how many companies claim to be specialists in this sector. With so many companies to choose from, how do you know which ones will provide you with the best service?