How to calculate turnover in accounting

As a small business owner, there are a lot of accounting terms that you’ll need to become familiar with; terms like turnover. 

To help get you up to speed, this article will cover everything small business owners need to about turnover in accounting, including:

• What is turnover in accounting?
• What does turnover mean outside of accounting?
• What’s the difference between turnover and profit?
• Why is understanding turnover important?
• How to calculate turnover in accounting?

In simple terms, turnover refers to the total sales of a business within an accounting period (for example, quarterly or yearly turnover). 

Turnover is sometimes called gross revenue, or income. So whenever you hear these terms, they’re all referring to the same thing. 

As a measure of your sales, turnover is a vital part of measuring business performance. Of course, it’s not the only factor, but it will be relevant at every stage of your business’ lifecycle, whether you’re in the planning stages, trying to secure investment, or thinking about selling the whole thing. 

Overall, turnover will let you know, in exact figures, how well your business is performing its basic goal of selling products or services, so understanding it is essential if you want to manage your business effectively. 

The term turnover can have different meanings depending on the context, which can be slightly confusing for new business owners. 

For example:

• In terms of employment, turnover refers to the number of employees that leave your business in a certain period of time. It can be a strong indicator of your workplace culture. 
• In terms of clients, turnover refers to the number of clients or customers that choose to stop using your business. 
• In terms of accounts receivable, turnover refers to the length of time it takes for the accounts to be paid. 

It’s worthwhile knowing what turnover means in different contexts. But for the purposes of this article, we’ll be covering what turnover means in accounting. 

People often confuse profit and turnover, but they’re very different in terms of how they’re measured and what they tell you about your business. 

Turnover measures the total sales made by your business, where profit is the amount of money you’ve actually made after costs have been taken into account. 

There are two ways you can measure profit:

• Gross profit: Total revenue minus the cost of the products you’ve sold, like manufacturing costs.  
• Net profit: Gross profit minus the cost of all your business expenses, like rent, wages, taxes, and admin costs. 

Turnover only tells you how many sales you’re making, whereas profits tells you how much money you’ll actually take home after the cost of business operations. It’s possible to have a high turnover while having a low amount of actual profits. 

Turnover is important for a few reasons. On its own, turnover will tell you how much interest there is in your business. In other words, a high turnover means there is definitely a demand for your products or services. 

That said, understanding turnover in relation to profits is far more valuable when it comes to assessing your business model. After all, turnover is just one part of the equation. Profit is your ultimate goal. 

If you know your turnover and profit figures, you can start to look at ways to improve your business. 

For example:

• If your turnover is high but your gross profit is low, you might need to look at the amount it costs to produce your products or services. Maybe you need to find new suppliers or manufacturers. 
• If your turnover is high but your net profits are low, it means you’re losing money on day-to-day running costs, which could be a sign of inefficiency. You can then start looking for ways to cut costs in your daily business operations. 

Apart from making better financial decisions, turnover can be used when securing investment to expand your business. 

For example, you could be losing money in manufacturing. A large investment might allow you to manufacture on a larger scale, reducing the overall cost and increasing the profits on each unit sold. 

Information like this will help convince investors that they’ll see a return on their investment. 

As long as you keep accurate accounting records, measuring turnover is pretty simple. 

You just need to record all of your sales over a certain amount of time and add them together. 

For example, adding all of your sales for a full tax year will show you your annual turnover, but adding together all of your sales for three months will give you your quarterly turnover. 

Again, turnover is much more helpful when it’s viewed in relation to gross and net profits. 

For example:

• Annual turnover: £60,000
• Cost of products sold: £15,000
• Gross profit: £60,000 – £15,000 = £45,000
• Business expenses: £10,000
• Net profit: £45,000 – £10,000 = £35,000

Laying it all out like this shows you exactly where your business is spending most of its money and where you can improve. 

Your general goal with turnover should be to translate as much of into profit as possible. 

Measuring your turnover is all about keeping accurate financial records throughout the year, and that’s quick and easy with the Countingup app. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like live cash flow insights, automatic expense categorisation, invoicing on the go, receipt capture tools and tax estimates, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.