Turnover is a term that we often hear in business circles, but what does it actually mean? There tends to be some confusion on the exact definition of turnover, and it’s not surprising. Just like with a lot of business jargon, it’s continuously used without any real explanation of what it means. For example, many people assume that turnover means profit, but this isn’t completely correct.
Understanding the word turnover as well as the actual concept is essential for any business owner, whether they’re a sole trader or working through a limited company.
Turnover is the amount of money that you bill your customers, minus any discounts and VAT. Therefore, turnover includes certain costs that some may not expect, including shipping and expenses. It’s also worth noting that turnover is the figure before you deduct any commission or PayPal fees for example.
The difference between turnover and profit is that profit is the amounts of earnings after you deduct any expenses.
One of the areas in which it’s important to know what exactly your turnover is, is VAT. It’s this number which dictates when you have to register for VAT- with the current threshold being £85,000. If you are not keeping track of turnover, pass the threshold and fail to register for VAT, you could be penalised by HRMC.
Calculating your turnover is much easier if you’re using accounting software such as Xero or Sage. When using this program, the process involves finding the profit and loss report and setting a 12-month date range.
Another factor to consider when calculating turnover is the fact that number you use should be based on when you’re providing goods and/or services, not when you invoice your client or when you receive payment. It’s also worth noting that turnover doesn’t include income from investments, for example, dividends.
Apart from the legalities and tax requirements of calculating turnover, is it also allows you to have a better understanding of your business. For example, calculating turnover will allow you to calculate profit, and this can provide a snapshot of the overall health of the company.
Data such as turnover and profit allows company owners to make changes in real-time, avoiding pitfalls and encouraging growth. It can sometimes be challenging to get past the business jargon and buzzwords, but once you break down this barrier, your company will benefit.
If you need advice or help with any financial aspects of your company, whether that be taxes, turnover or VAT calculation, working with Salhan Accountants can offer a wealth of benefits.