Turnover! It’s a word that many business owners drool over as they tell you how much their business has achieved this financial year. But what does it really mean?
Owning a business with a great turnover sounds impressive, but if it’s smaller than what’s owed to suppliers, then it’s not as good as it sounds!
Turnover at Thomas Cook was almost £10 billion when it collapsed, but because its debts were almost £2 billion and it was already paying out salaries etc, the turnover figure didn’t really reflect the health of the business.
So what is turnover?
In accountancy, turnover is how much a business makes in sales during a specific period. The sales can be in cash, credit or debit card transactions.
Usually, turnover refers to net sales, which are sales after discounts, returns or allowances. Your gross sales figures are what you have taken before such discounts. So, if your business doesn’t give discounts or refunds, then the figures may well be the same.
And what is my profit?
There’s a saying: turnover is vanity and profit is sanity. What it means is that no matter how good the turnover looks, the health of a business is shown in its profitability.
Profit is how much money your business makes after you take away the cost of doing business.
There are three types of profit : gross, operating and net. This is what they mean:
Gross profit: This is sales less the cost of goods sold. What that means is you’ve taken into account, or subtracted the expenses that were needed to produce the goods and services needed.
Operating profit: This is your gross profit minus operating expenses. These expenses are the likes of your overheads, such as rent and heating.
Net profit: This is your operating profit less your taxes and interest from any loans.
Turnover and profit
As you can see, profit and turnover are both a way to measure the earnings of a business. Turnover is a measure of the earnings without taking the costs into account.
Profit, on the other hand, is the earnings of a business after costs. You can think of profit as the money your business gets to keep after spending on all your necessary expenses.
If you fail to make profits, then your business will struggle or you will need to look at other means to raise the funds necessary to run your business. But remember, any interest on loans or credit then becomes one of those costs, and they can build up, as happened to Thomas Cook!
Guidon Group is a chartered management accountant in Stockton that serves Teesside and the North East.