Turnover, income, revenue…what does it all mean? What is turnover in business and why is it important?
Knowing how key financial terms, like turnover, differ from others is important if you’re to stay tax compliant and successfully pitch your business to lenders. Find out everything you need to know about turnover in business contexts in this article.
- What is turnover in business?
- Why does turnover matter?
- How is turnover different from income and revenue?
- How to calculate your business’ turnover
- How to track your turnover across time
- How to understand your turnover better with Countingup
At Countingup, we want to empower business owners to take control of their finances with ease. Read on to find out more about what turnover is in business, how to calculate and manage it, and how Countingup can help build your business better.
What is turnover in business?
‘Turnover’ has two meanings depending on the context it’s used in.
In accounting, turnover has a defined legal framework specified in the UK’s 2006 Companies Act. Here, ‘turnover’ refers to the amount of money a company makes from its product or service after discounts and taxes (like VAT) are applied to a bill or invoice. In this context, turnover may also be called gross income or net sales. This is because the figure has already had deductions for the customer applied to it (making it net sales), but not the additional business expenses (making it gross revenue or profit).
Turnover can also refer to the rate of inventory change a business has. This is an older definition of turnover where inventory would be sold and older stock would be turned over to make space for newer stock. For this reason, this definition is sometimes applied to staff.
Why does turnover matter?
Turnover is important because it’s a legally defined accounting term; knowing how to calculate it is important if you’re to stay tax compliant while trading.
Even though you’re setting up a new business and getting to grips with accounting and financial terms, HMRC’s penalty system for reporting errors and missed deadlines still applies. Having an accountant can help you avoid these technical mistakes but knowing these important terms yourself can also help you become more confident in business.
Additionally, because turnover refers solely to your business’ sales, it’s a figure that directly speaks to your business’s value within the market. Therefore, you can use it to appear more confident within business environments and make investment pitches to potential investors more attractive.
How is turnover different from income and revenue?
Income as a term has lots of overlap with ‘turnover’ in business, as they each refer to how much money a business makes. However, there are some slight differences between each term as they each refer to different ways a business has made money.
‘Income’ is different from ‘turnover’ as it can refer to other ways a business makes money, like the interest it gains from savings or the one-time sale of an asset (like old machinery). Therefore, because these other sources of income for the company aren’t from normal operations from goods or services (like the Companies Act 2006 specifies for its ‘turnover’), they are classed as income.
In a sentence, a business’ ‘turnover’ is one way it can have income, and once all sources of income are added up, they are collectively referred to as revenue. However, because the differences are so slight, most people will forgive you if you mix them up.
How to calculate your business’ turnover
You can calculate your business’ turnover easily using the formulae below. As you’re calculating your final sum, make sure you use the same timeframe for all your calculations (within a set month or week period). This will help you avoid double-counting sales from the same period and will make your accounting records more accurate.
Turnover = number of units sold x price per unit
If your business is in services, a similar formula can be used. Calculating turnover for your business may be more variable as you may negotiate with clients on price more. Therefore, make sure to double-check your numbers so you have every figure down correctly.
Turnover = number of client sessions x price per client
In each example, if you’ve given discounts or applied VAT to your prices, make sure to use the final sum the customer has actually paid. Otherwise, you may have an inflated income statement and could pay higher tax rates on it.
How to track your turnover across time
Using the above formulae for your business, you can track your turnover across time. As you do, make sure to consider how you’ll define different time periods as some months may be shorter or longer than others.
How to understand your turnover better with Countingup
Calculating turnover figures is an essential step in managing any business’ finances. However, while it’s an important process, it is often a time-consuming one. Save time on your financial admin and get back to doing what you love with Countingup.
Countingup is the business current account and accounting software in one app. You can use it to automate your financial admin and save time and stress on your bookkeeping.
The Countingup app comes with automated invoicing features so you can share payment details with customers with ease. The app also offers real-time profit and loss insights. It nudges you to keep your financial records up to date, so that you can be confident in the accuracy of your turnover figures.
Find out more here and sign up for free today.