Are you clear on what exactly turnover means? How about the different types of profit?
Knowing how well your business is doing helps in numerous ways- expansion, applying for funding, taking on employees etc… Understanding both your turnover and profit is an especially useful way to see how you’re doing- or what might just need some tweaking.
Remember, turnover is a good measure of success but don’t confuse it with profit.
Looking purely at your turnover without understanding or appreciating your costs and outgoings DOES NOT GIVE THE FULL PICTURE. Simply put, turnover is the whole pie, your profit is what’s left after you slice out all of your expenses.
What’s the difference between turnover and profit?
- Turnover is the total sales made by a business in a certain period. It’s sometimes referred to as income as it relates to the businesses income, or money coming in. Profit is the money left after all of your business expenses have been deducted. These are things like stock, manufacturing costs, operational costs and staff wages.
- There are two different ways that people refer to profit.
- ‘Gross profit’ means sales, minus the cost of the goods or services you sell
- ‘Net profit’ is the figure that’s left over after all expenses including tax.
How to calculate business turnover?
Working out your turnover isn’t difficult, in fact it’s quite easy – especially if you’ve followed some of our earlier advice and you’ve been keeping good financial records! A friendly reminder that keeping your business accounts and records up to date is a simple way to help ensure accounting accuracy and save you a lot of time and stress in the long run.
To determine turnover you add up all of your sales! That’s it. Simple.
What about working out profit?
To work out your gross profit, deduct the cost of your sales from your turnover.
To work out net profit, take your gross profit and deduct all other expenses – this includes tax!!!
Why is understanding my business’s turnover important?
Knowing your business’s turnover helps you to know what you need to do to increase profit.
If your gross profit is low by comparison to your turnover, you could look at ways of saving direct sales costs- things like sourcing less expensive materials
By working out your turnover, you’ll know if you need to register for value added tax (VAT). If your business has an annual turnover above £85,000, then it’s a legal requirement to register for VAT.
The bottom line when it comes to turnover and profit is this – understanding your operation’s turnover and expenses can take some time to fully understand BUT can be made much easier by keeping good up to date financial records.
When thinking about all of the different components and responsibilities of starting a business can be overwhelming, we get that. The important thing to remember is that the team at Tree Shepherd are here to support you through every step of this amazing (and challenging!!) journey.