Thinking of starting up a business you may need an understanding and clarification on some of the important terms used in the daily running of the business. This article gives an understanding of turnover and profit as used in business, highlighting their similarities and differences.
What is turnover in Business?
Business turnover is the total sales in a given business as calculated over a specific period of time. Turnover is usually referred to as income or gross revenue. The performance of any business will be determined by turnover figures throughout the whole life of your business. The figure will help you during the planning and securing investment and can be used as a measure of performance when valuing and planning to sell your business.
Away from finances, business turnover can also be defined in two other ways.
Employee turnover is the number of staff that exit your business over a specified period of time.
Accounts receivable turnover is the amount of time your credit customers or clients take to pay their dues.
How to Calculate Turnover in Business?
Calculating a business turnover for your business is a relatively straightforward task. If you keep your sales record, you need to add the total number of sales figures for a given period of time, sat a year, a quarter, or a month.
The turnover figure of your business can further be used to calculate the profits of your business.
- To work out the gross profit, deduct the cost of your sales from your turnover
- To work out the net profit, take your gross profit and deduct all other expenses – not forgetting your tax liabilities
Importance of Turnover in Business
- The turnover figure will help you to measures a business’s performance, planning, and securing investment.
- Understand your turnover will help you in working out the requirements to generate the levels of profit you’re aiming for.
- An increase in the turnover of your business increases theoretically indicates larger profits.
- When the net profit is a low proportion of turnover, you might need to look at the efficiencies in your business.
What is Profit in Business?
Profit is a financial gain a business makes when all expenses have been deducted. It is the surplus fund represented by money on paper in your accounting system, which can be used to invest and grow your business.
There are two types of profit that you can calculate in your business as explained below.
Gross profit in Business
This is also referred to as the sales margin. It is calculated by subtracting the cost of goods or services from the turnover figure. Gross profit assessment in a business provides a figure that reflects on how efficiently the company uses its labor and supplies in providing goods or services.
The metric for calculating gross profit mostly considers costs that fluctuate with the level of output. Such costs are listed below.
- materials
- direct labor, assuming it is hourly or otherwise dependent on output levels
- commissions for sales staff
- credit card fees on customer purchases
- utilities for the production site
- shipping
Operating Profit in Business
Operating Profit is the revenue after accounting for the cost of producing your product or service and the cost of running your business.
The operating expenses include the following,
- Rent
- Marketing
- Payroll
- Insurance
- Equipment
- Depreciation
- Administrative tools.
Net Profit in Business
Net profit refers to the amount of revenue yielded from your business after various expenses have been deducted from the total revenue.
These expenses can include the following.
- Interest
- Operating expenses
- Tax liabilities
- Utility bills
Net profit is also referred to as the net income, bottom line, or net earnings. In the business books of account, net profit is found on the last line of the income statement.
A low or negative net profit is a red line and is indicative of various issues in your business such as those listed below.
- Fewer sales
- Poor management of expenses
- Poor marketing
- Ineffective pricing
- Poor customer service experience from employees
A high or positive net profit can be attributed to several favorable variables.
Turnover vs Profit in Business
- Turnover and profit are often confused. Here are the differences and similarities.
- Both turnover and profit are parameters found on the income statement.
- Turnover does not depend on profits, while profits calculation depends on the turnover figure.
- Turnover and profit are two different parameters that are mathematically calculated in different ways as earlier explained in this article.
- Turnover is located at the top of the income statement while profit is located at the top of the income statement.
- Turnover is the net sales, as generated by a business from selling its core products and services, while profit is the residual earnings of a business after all expenses have been charged against net sales.
- Turnover can be used to indicate the number of assets or liabilities in a business as compared to the sales level that it generates. Profits cannot be used to indicate assets and liabilities. For instance, a business that has an inventory turnover of five needs to sell all of its on-hand inventory five times a year in order to generate the annual sales volume. The information on turnover is useful for determining how well a business is managing its assets and liabilities.
- An increase in the turnover of a business theoretically indicates the generation of larger profits. Profits are therefore directly dependent on turnover.
- Turnover in business can be described as operational or non-operational, as explained in the first parts of this article, while profits can be described as gross profits or net profits.
- Turnover is a superior topline figure in the business operations that covers revenue and sales, while profit is a bottom-line figure that covers net income, net profits, and profit after tax.
There is very little similarity between turnover and profit. This article has described the two terms highlighting the similarities and the difference between those two terms, therefore, giving you some of the insights and knowledge that you need to set up your own business.