Turnover 101: What It Is & Why It Matters for Your Business
As a business owner, you should be on top of everything there is to know about your company’s present and future. Whether you plan a business expansion, apply for a loan, look for investors or sell your company, knowing the ins and outs can help you.
One thing you should know about is turnover. Turnover is a crucial indicator of business performance, and it is different from your profit.
Learn more about turnover when you continue reading.
What Is Turnover?
Turnover is the amount of money that changes hands within your business. This includes all the sales, the purchases and the bills paid by your company.
While profit tells you how much your company gained or lost, turnover tells you how much your company is active. The company's turnover is a measure of the number of sales made during a period. It is calculated by taking the total sales and dividing it by the number of days the company was open during that period.
Is Turnover the Same as Profit?
A person may confuse turnover with profit. This is because these two business indicators are related. When you calculate profit, you must also calculate the turnover.
However, the turnover of a business and its profit are not exactly the same thing. A company can have a high turnover but a low profit.
For example, if you have a small business with a big sales volume, you must have a large turnover, but your expenses may eat a portion of these sales.
The profit is the amount of money that remains after deducting the costs from the turnover. While turnover is often referred to as the volume of sales, profit results from sales minus expenses.
How Can You Calculate Turnover?
You can calculate your turnover by doing the following:
Retail Turnover = Sales Volume x Number of Days in Period
By taking the total sales in the period and dividing it by the number of days that you were open during that period, you get the business's turnover.
For example, if your business was open for 40 days and you have total sales amounting to £5000 in that period, your turnover is £5000 ÷ 40, or £125.
If you want to calculate the turnover by year, you can use the following formula:
Total Turnover = Sales Volume x Number of Days in Year
If your business was open for 365 days in the year and you have total sales amounting to £5,000 in that period, then the turnover of your business is £5,000 x 365, or £1,313,000.
Why Does Turnover Matter?
The turnover of a business is a significant business indicator. It tells you the level of business activity and helps you decide if you can increase or reduce your business costs.
You can use the turnover of a business to help you decide the following:
Making a Profit
Excess turnover often leads to profits. However, if your turnover is low and your expenses are high, you should consider reducing the number of employees or their salaries.
Expanding Your Business
If your turnover is low and your profit is nonexistent, you should consider expanding your business.
Reducing Business Costs
If your turnover is high, but your profit is low, you should look for ways to reduce your costs. By doing this, you can help improve your profit.
If you have an established business, it is a good idea to review your business turnover to determine if you should reduce or increase your business expenses. The turnover of your business is a pivotal tool to determine the financial health of your business, and it should help you craft a better business plan by knowing how much your business is active and how much income you get from that.
For accountancy services for small businesses in Hillingdon and nearby areas, 1 to 1 Accountants is your best choice. Using the latest accounting technology, we can help you understand your turnover through our services, including handling annual accounts, taxes, bookkeeping and many more. Contact us today to get started.