Profit and turnover is something business owners love to brag about. But there is a big difference between the two.
Owning a business with a great turnover sounds impressive. But what really matters is how profitable a business is.
If the turnover sounds substantial but is smaller than what’s owed to suppliers, then the business may not be as healthy as it sounds.
Thomas Cook’s turnover was almost £10bn when it collapsed in September 2019. Its debts were almost £2bn and it was still paying out salaries, etc. and had to pay into a pension pot.
So, the turnover figure didn’t really reflect the health of the business. It was losing money quickly and couldn’t pay its debts.
As a result, investors were nervous and it couldn’t find anyone willing to finance its future.
So what is turnover?
In accountancy, turnover is how much a business makes in cash sales during a specific period, usually a tax year. The sales can be in cash, credit or debit card transactions.
Usually, turnover refers to net sales, which are sales after discounts, returns or allowances.
Your gross sales figures are what you have taken before such discounts. So, if your business doesn’t give discounts or refunds, then the figures may well be the same!
If you keep accurate financial records (and you should for your tax purposes) it should be easy to add your total sales together. The resulting figure is your turnover.
And what is my profit?
Have you heard the saying about turnover being vanity while profits are sanity?
Profit is how much money your business makes after you take away the cost of doing business.
For example, if you have made £10,000 profit you need to then subtract how much it cost you to make that money. This includes items such as overheads, buying supplies, travel, etc.
There are three types of profit too! Your profits are reported as being gross, operating or net. So, what is the difference?
Gross profit: This is sales less the cost of goods sold. What that means is you’ve taken into account, or subtracted the expenses that were needed to produce the goods and services needed.
Operating profit: This is your gross profit minus operating expenses. These expenses are the likes of your overheads, such as rent and heating.
Net profit: This is your operating profit less your taxes and interest from any loans.
Turnover and profit
Both turnover and profit are ways to measure the earnings of a business. Turnover is a measure of the earnings without taking the costs into account.
Profit is the earnings of a business after costs. You can think of profit as the money your business gets to keep after spending on all your necessary expenses.
Those expenses can be the cost of wages, suppliers’ costs and overheads such as rates or rent.
If you fail to make profits, then your business will struggle or you will need to look at other means to raise the funds necessary to run your business.
But remember, the interest on any loans or credit then becomes one of those costs, and they can build up, as happened to Thomas Cook!
If you are a business owner looking for no-nonsense advice about your financial position and your accounts. We’re based in Newcastle but we deal with companies across the North East.
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