Your accountant tells you that turnover is low and your profit is shrinking. But what exactly does he mean? And how do you use this information to boost business?
Ahead, we break down the difference between turnover and profit in business.
What’s turnover in business?
The term turnover in business can cause confusion as it has more than one meaning. Turnover can mean the rate at which inventory or assets of a business “turn over” a.k.a sell or exceed their useful life. It can also refer to the rate at which employees leave a business.
But turnover in accounting is how much a business makes in sales during a period. The sales can take the form of cash, debit card or credit card transactions.
But usually, turnover refers to net sales. Net sales is sales after any allowances, discounts and returns. This is because refunds, discounts and allowances for damaged goods eat into sales. Net sales, then, give you a better idea of the quality of sales transactions than gross sales. But your gross and net sales figures may be the same if you made no allowances, discounts or refunds.
What’s profit in business?
Profit is how much money a business pockets after the costs of doing business. You can calculate it by subtracting expenses from sales. But the specific expenses you should subtract depend on the type of profit you want to calculate. There are three main types of profit:
- Gross Profit: This is sales less the cost of goods (COGS) sold. COGS expenses are those that go into the production of goods or services for the business. Examples include direct material, labor and shipping costs.
- Operating Profit: This is gross profit less operating expenses. Operating expenses keep a business running day-to-day. Example expenses include rent or utilities.
- Net Profit: This is operating profit less taxes and interest from loans.
What’s the difference between turnover and profit?
Both profit and turnover in business measure earnings. But turnover measures them before taking out major costs. Profit is residual earnings after costs. You can also view it as the money your business gets to keep after reducing the net sales figures by all expenses.
Still fuzzy on these two terms? The easiest way to tell turnover and profit apart is to look at an income statement. Net sales is usually the sales figure you list on the top line of an income statement. It is the starting point of the financial assessment. Net profit, meanwhile, is on the bottom line of the statement. This is why we call net profit a business’s “bottom line.” It also represents the end of the financial assessment.
How to use this info
Understanding profit and turnover in business comes in handy on many occasions:
- It helps you prepare an income statement. After all, you cannot assess your profit without first accounting for your sales
- It you project your profit based on your current turnover
- It alerts you to quality or production issues. Low turnover may be due to a problem with your product or service that you can fix
- It gives you the chance to adjust other expenses when turnover is low. This way, you can still turn a profit
- It gives you the chance to invest when turnover is high. If your turnover is high, you can use the extra profit to put more money into another area of the business.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.