5 Feb 2020
Calculating turnover is one of the most exciting tasks for business owners because it tells you exactly how much money you have taken.
It is essential to understand turnover, alongside costs, so you can calculate how much you need to reach the more important profit and therefore earnings you are targeting.
The words ‘turnover’ and ‘revenue’ often mean the same thing and people use them interchangeably. They refer to total sales of the business over a certain period.
Turnover is a key measure of a business’s performance. It is used throughout the company’s life, from measuring performance to securing investment and valuing for a sale.
Assets and inventory ‘turn over’ when they flow through your business, by being sold, wastage, or by outliving their useful life.
The word turnover can also refer to business activities that do not necessarily generate sales. For example, staff turnover; accounts receivable turnover; and portfolio turnover; all measure movements in and out of those areas.
But for financial and tax reporting in businesses, turnover refers to the total value of everything you sell.
Turnover is the total sales that your business generates in a specific period - for example, the financial year.
It is relatively simple to work out. Provided you keep accurate records of all your sales, you can add them up easily using the sum tool in a spreadsheet such as Excel, or in your accounting or invoicing software.
In the UK, companies must choose between two different accounting methods recognised by HMRC - ‘simplified cash basis accounting’ and ‘traditional accounting’.
Under traditional accounting, turnover is all the sales your company has earned in the financial year, including those not yet paid for.
With the simplified cash basis, turnover only includes the money that comes in during the financial year, and excludes money earned but not paid in that period.
In the UK, another reason for measuring turnover is to see whether you need to become VAT registered.
If your revenue is near £85,000 - the current VAT threshold - you must measure the ‘VAT taxable turnover’. This is the total value of everything you sell that is ‘VATable’ - that is, not exempt from VAT.
If this figure exceeds the threshold over any rolling 12-month period, you must register for VAT and charge it on your services. This is not a fixed period like the tax year or the calendar year - it could be any 12-month period, for example, the start of June to the end of May.
Some companies register for VAT even if their turnover is under the threshold - for example, if their revenue has temporarily dipped under £85,000, or because it makes them look like a larger company.
If your business is registered for VAT, the sums you invoice and receive include VAT, but your turnover is total sales, excluding VAT. This is because your company has not earned the VAT element. You must pay that over to HMRC quarterly.
Turnover is a crucial measure of a company’s health, but do not confuse it with profit. Profit is a measure of earnings and is the total sales minus the costs of the business. As the saying goes, ‘Revenue is vanity, profit is sanity’ – in other words, no matter how good your sales, you cannot run a successful business without good profits.