Starting and running a business in the UK can be an exciting yet challenging endeavour. One of the key metrics you’ll need to track is your business turnover. But what exactly does turnover mean and why does it matter? Let’s take a closer look at turnover and how it impacts UK businesses.
So what is turnover?
Quite simply, turnover refers to the total amount of money your business brings in over a specific period of time. It’s sometimes referred to as revenue or sales volume. Turnover doesn’t account for business expenses or costs, just the total value of goods sold or services provided.
For many startups and small businesses in the UK, monitoring turnover is crucial. It shows whether your business is growing and allows you to forecast cash flow. Comparing turnover month-to-month or year-to-year can indicate trends and seasonal fluctuations. This helps with planning and setting targets.
Calculating turnover
Figuring out your turnover is straightforward: take the total amount of sales made over a given timeframe. For example, if you sell £50,000 worth of products or services in a month, your monthly turnover is £50,000.
To get your annual turnover, add up the total sales for the full tax year. Most UK businesses operate on a financial year that runs from 6 April to 5 April the following year. So your annual turnover would be all sales made during those 12 months.
Turnover vs. profit – what’s the difference?
One common mistake is confusing turnover and profit. While they are related metrics, they measure different things.
Turnover refers to total sales. Profit is what’s earned after deducting business expenses from turnover. Expenses include costs like:
- Materials and inventory
- Rent and utilities
- Staff wages
- Equipment and supplies
- Marketing and advertising
- Tax and interest payments
So while turnover reflects income, profit shows your actual bottom line after costs. A business can have high turnover but low profitability if expenses are also high. Both metrics are vital to monitor when running a UK business.
Why is turnover important?
Tracking turnover serves several useful purposes:
- Assess business growth – Comparing turnover at different periods shows if your business is growing. A rise in turnover indicates you’re gaining momentum in the market.
- Set targets – By understanding your current turnover levels, you can set realistic goals for the future. This helps motivate your team.
- Manage cash flow – Turnover projections help anticipate cash flow needs. If turnover is increasing, you may need to also boost inventory or staff.
- Value your business – Turnover and profit figures feed into business valuations. High turnover can increase your business’s worth.
- Identify issues – If turnover stagnates or drops, it could signal problems like declining demand, increased competition or seasonality issues.
- Tax planning – Turnover impacts taxes like VAT. Knowing your numbers assists with tax compliance and planning.
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Turnover thresholds and VAT registration in the UK
Speaking of taxes, turnover thresholds determine when UK businesses must register for and charge Value Added Tax (VAT).
The current VAT registration threshold is taxable turnover above £85,000. Once your turnover exceeds this in a 12-month period, you must register with HMRC and charge VAT on sales. There are also thresholds for VAT schemes like Flat Rate and Cash Accounting.
So monitoring turnover helps you remain compliant with UK tax rules as your business grows.
How to calculate turnover in the UK
Now that you know why turnover matters, let’s look at tips for calculating it accurately:
- Use accounting software – Programs like Xero or QuickBooks track sales and run turnover reports automatically.
- Separate totals by month – Don’t just look at annual turnover. Break it down month-by-month to spot trends.
- Remove refunds/returns – Subtract any refunded or returned purchases from turnover totals.
- Calculate gross turnover – This includes everything sold, even items later discounted.
- Track both cash and accrued sales – Accrued turnover includes sales not yet paid for.
- Remove VAT – Your turnover total should not include any VAT collected.
- Convert foreign sales – Convert overseas sales to British pounds when tallying turnover.
- Compared to forecasts – Actual turnover will differ from projections. Analyze why it was higher or lower.
- Remove one-off lump sums – Large one-time sales can skew turnover. Consider removing them.
Final Thoughts
Monitoring and managing turnover is a vital part of running a successful business in the UK. By regularly assessing your turnover and profitability, you gain key insights into the financial health and growth of your company. Just be sure to accurately calculate turnover totals and differentiate between turnover and profit. This will provide the visibility you need to set targets, value your business, and make smart decisions.