Understanding the difference between turnover and profit is a key part of managing any successful business. While the two terms sound similar, they refer to very different financial metrics.
We’ll clearly explain the distinction between turnover and profit, including definitions and calculations. We’ll also look at why both metrics matter for businesses in the UK and provide relevant examples. Read on for a handy guide on decoding these fundamental business concepts.
What is Turnover?
Turnover, sometimes called revenue or sales, refers to the total amount of money generated by a business over a specific period of time. It does not account for business costs or expenses.
Specifically, turnover is calculated as the total value of goods sold or services provided before any costs or taxes are deducted. It is often viewed as a top-line number that indicates the overall sales performance and market demand for a company’s offerings.
Some key things to know about turnover:
- It is recorded on the income statement, under the revenue section.
- Turnover is calculated over a set time frame – monthly, quarterly or annually.
- It includes all sales revenues – cash, credit, refunds, discounts etc.
- Turnover is also known as gross sales or gross revenue.
- For retailers, turnover refers to the value of stock sold during a period.
- For service businesses, it is the value of services delivered to clients and customers.
- Turnover will vary greatly between industries and individual businesses.
To calculate turnover, simply add up the total value of goods or services sold over the period you are measuring.
For example, if a retailer sold £200,000 worth of products in one month, their turnover for that month would be £200,000.
What is Profit?
In simple terms, profit is the amount of money a business has left after deducting all its operating expenses from its turnover.
While turnover refers to total sales, profit factors in the costs involved in generating those sales. This includes:
- Cost of goods sold (COGS) – Materials, production costs
- Operating expenses – Rent, payroll, utilities
- Depreciation – Wear and tear on assets
- Interest – On loans and debt
- Taxes
To calculate profit, the following basic formula is used:
Profit = Turnover – Costs
Or alternatively:
Profit = Turnover – COGS – Operating Expenses – Depreciation – Interest – Taxes
Types of profit metrics include:
- Gross profit – Turnover minus COGS
- Operating profit – Earnings after operating costs are deducted
- Net profit – Remaining after all expenses, interest and taxes
Profit represents the actual earnings or bottom-line financial performance of a business over a period of time. It is a key indicator of success and the ability to generate shareholder value.
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Why Turnover and Profit Both Matter
Turnover and profit both provide valuable insights for UK businesses:
- Turnover shows sales growth trends and market demand. Growing turnover is important for scaling up revenue.
- Profit indicates the underlying health of the business. A high turnover figure doesn’t necessarily equate to strong profits.
- Comparing turnover and profit quarter-over-quarter or year-over-year shows efficiency. Is your profit margin growing in line with turnover?
- Both metrics are useful for forecasts, budgets and performance reviews.
- Lenders and investors will analyze both turnover and profit. Healthy turnover shows sales traction, while consistent profits demonstrate financial viability.
Turnover vs. Profit Example
Let’s look at a simple example to illustrate the difference between turnover and profit:
A bakery sells £100,000 worth of baked goods in August. Its costs for that month are:
- Ingredients = £30,000
- Rent & bills = £10,000
- Staff wages = £15,000
- Equipment depreciation = £5,000
The bakery’s turnover for August is £100,000.
Its gross profit is: £100,000 – £30,000 (COGS) = £70,000
Its net profit is:
£100,000 (Turnover)
- £30,000 (COGS)
- £10,000 (Rent & bills)
- £15,000 (Wages)
- £5,000 (Depreciation) = £40,000 (Net profit)
As you can see, while turnover was £100k, actual profits were only £40k after accounting for all costs and expenses.
Tracking both metrics allows businesses to monitor revenue growth (turnover) and bottom-line earnings (profit) over time.
Turnover vs. Revenue vs. Profit
Some people use the terms turnover, revenue and profit interchangeably. However, they have distinct meanings:
- Turnover specifically refers to total sales.
- Revenue is a broader term for all income streams like sales, services, investments etc.
- Profit equates to what is left after subtracting costs from revenue.
For example, a company might generate £1 million in turnover, £1.1 million in total revenue, and £200,000 in profit.
Turnover = £1 million in sales Revenue = £1.1 million (sales + other income)
Profit = £200,000 (revenue – costs)
Gross Profit vs. Net Profit
Gross profit and net profit are both types of profit metrics. As we saw in the bakery example:
- Gross profit is turnover minus the direct costs to produce goods/services (COGS).
- Net profit deducts ALL operating expenses from turnover, including COGS, overhead, depreciation, taxes, interest etc.
Gross profit shows profitability after subtracting production costs. Net profit reflects the final retained earnings after all costs and expenses.
For retailers, gross profit is the amount left after purchasing stock. For manufacturing, it is revenue minus production costs.
Net profit therefore provides a complete picture of bottom-line profitability. But analyzing gross profit margins over time shows production cost efficiency.
Key Takeaways
- Turnover is total sales or revenue generated before any costs are deducted.
- Profit is what remains after accounting for all business costs and expenses.
- Turnover signals sales growth and demand. Profit represents bottom-line financial performance.
- Both metrics provide valuable insights for UK businesses when it comes to budgeting, performance measurement and growth.
- Understanding the differences between terms like turnover, revenue, gross profit and net profit is important for financial analysis.
Hopefully, this breakdown demystifies these fundamental concepts for business owners, managers and finance analysts. Tracking turnover and profits consistently over time provides vital intelligence for strategic decision-making and building a healthy, thriving company.