Whether you’re creating a business plan, speaking to an accountant for the first time, or looking for funding to grow your business, it’s important to understand turnover, revenue, and profit. But what is turnover, if you’ve never dealt with financial matters before, and how do you calculate it?
What is turnover?
Financial turnover is defined as the amount of money taken in by a business in a particular period, also referred to gross revenue or income. This is the total amount your business has brought in, minus discounts and VAT, before any costs are deducted to calculate your actual profit.
It’s important for a variety of reasons. If your turnover is £90,000 or more, you’re required to register for VAT, as of April 1st, 2024. You’ll also need to know the figures if you’re taking out business insurance, applying for a grant or loan, and when it comes to filing accounts and taxes.
Tracking turnover over time can also be useful for managing your business. Increasing your turnover demonstrates that demand and sales have grown for your products or services. But the cost of finding and securing new clients or customers may mean that your profits haven’t risen by the same proportion. That’s fine if it meets your current business objectives, but could show that you need to reduce your costs to remain viable in the future.
And if your turnover starts to drop, it’s a sign that you may need to put more energy and resources into sales and promotion.
There are some other business-related uses of turnover, including employee turnover (the number of staff leaving within a specific period), stock turnover (how often your inventory needs to be replaced), and accounts receivable turnover (how long it takes clients or customers to pay – find out more about tackling late payments).
Calculating turnover versus gross and net profits
To work out your turnover, you simply need to add up all income from sales within a set amount of time, subtracting any trade discounts, product returns and VAT (if applicable).
You can then subtract the cost of those sales to produce your gross profit, and all other expenses for your net profit.
Turnover is usually requested and calculated over the annual financial year, or on a quarterly basis. And various invoicing and accounting tools for freelancers and the self-employed will help you track your turnover and profits, assuming you’re recording everything in a timely fashion.
For example:
-
Total turnover: £75,000
-
Cost of goods and services sold: £15,000
-
Gross profit = £60,000
-
Operating expenses: £10,000
-
Net Profit = £50,000
Why is turnover important for small businesses?
Keeping track of your growth and turnover is important for small businesses, even if it’s often not a measure of success in itself. If you’re a smaller sole trader or solo limited company director, you may be focusing on servicing a limited number of clients or customers, and not currently looking to expand. But knowing your turnover and profit figures will highlight if you have unnecessary costs in your business, or you’re working with an unprofitable client (for example, if they’re constantly requesting unbilled amounts of time from you over a long period).
It will also give you time to prepare if you’re heading towards the mandatory VAT threshold, and will mean you’re ready if you receive an unexpected offer to buy your business.
Growing turnover is also a useful indication and reassurance if you’re thinking about expanding, and taking on sub-contractors or staff. And an early warning sign if demand for your current products and services may be dipping due to temporary circumstances, or if the market is changing permanently.
And if you’re looking to attract funding through loans, grants, investors, or new partners, you may want or need to prioritise growing your turnover versus extracting profits from the business to make it a more attractive proposition.
Ultimately, turnover is a key indicator of the health of your business right now, and an indication of the future. So it’s an important metric to understand and review on a regular basis to ensure you’re building a successful self-employed career or business.
Looking for more advice? We can help.
We have a dedicated advice page to help you navigate directly to specific sections including mental wellbeing, starting out, tax, and winning work.
View all advice pages
How-to advice
Find practical and detailed advice on starting a self-employed business, focused on specific industries and career paths.
Insurance advice
Make sure that you are protected with the key insurances needed by the self-employed community.
Self-employed Tax guidance
It's important to create good financial habits throughout the year to make any tax deadlines go that much smoother.
Self-employed families and parents
Find advice on many aspects of freelance life as a parent.