Your accountant tells you that turnover is low and your profit is shrinking. But what exactly does this mean? And how do you use this information to boost business?
Below, we break down the difference between turnover and profit in business.
What is a turnover?
Turnover is the total sales made by a business in a certain period. It’s sometimes referred to as ‘gross revenue’ or ‘income’. This is different to profit, which is a measure of earnings.
It’s an important measure of your business’s performance. Knowing your turnover figure is useful throughout the whole life of your business – from planning and securing investment, through measuring performance, to valuing your company if you plan to sell.
What is a profit?
Profit is how much money a business pockets after the costs of doing business. You can calculate it by subtracting expenses from sales. But the specific expenses you should subtract depend on the type of profit you want to calculate. There are three main types of profit:
Gross Profit: This is sales less the cost of goods (COGS) sold. COGS expenses are those that go into the production of goods or services for the business. Examples include direct material, labor and shipping costs.
Operating Profit: This is gross profit less operating expenses. Operating expenses keep a business running day-to-day. Example expenses include rent or utilities.
Net Profit: This is operating profit less taxes and interest from loans.
What Is The Difference Between Revenue And Profit?
Both profit and turnover in business measure earnings. But turnover measures them before taking out major costs. Profit is residual earnings after costs. You can also view it as the money your business gets to keep after reducing the net sales figures by all expenses.
Although turnover and revenue aren’t quite the same, they do often correlate, as when your business earns more by turning over its inventory frequently. Successful inventory turnover that generates revenue doesn’t necessarily mean that your company will be profitable. If you reduce all of your inventory to clearance prices to sell it quickly, your turnover rate will be high and you may bring in plenty of revenue, but your profit will be low, because you aren’t charging enough, relative to your inventory costs.
Still confused on these two terms? The easiest way to tell turnover and profit apart is to look at an income statement. Net sales is usually the sales figure you list on the top line of an income statement. It is the starting point of the financial assessment. Net profit, meanwhile, is on the bottom line of the statement. This is why we call net profit a business’s “bottom line.” It also represents the end of the financial assessment.
Is turnover more important than profit?
According to some financial experts most often turnover is vanity, but profit is sanity. This means that while a massive sales turnover looks impressive, there’s rarely a commercial benefit to this unless it creates profit.
But there are, of course, exceptions. For instance, a business might prioritise building up its market share or customer base in its early stages, which can lead to a chunky turnover despite minimal profits of any type.
