Finance

What Is Company Turnover & How Do You Calculate It?

Allison S Robinson | 11 May 2022 | 2 years ago

what is turnover

What is turnover? This is a question that many new business owners need to know the answer to when they first start their companies. Company turnover is a term used to describe the total sales made by a company during a specific period of time. This number tells you how much money your company has made before expenses are subtracted. It is an important number for many reasons but there are many other factors to consider when judging the performance of a business.

In this article, we will discuss what company turnover is, and why it’s important for business owners to understand this metric. We will also cover some opportunities that can arise with a high or low turnover, and explain other important considerations in terms of profit and performance so that you can get a true picture of the health of your business.

What is Company Turnover?

Company turnover is the total revenue generated by a business in a specific period of time, usually one year. It is sometimes referred to as “sales volume,” “income” or “gross revenue” with all terms meaning more or less the same thing. Many new business owners misunderstand the meaning of turnover, thinking it is the same as profit. However, turnover and profit are two very different things.

Profit is the money left over after all expenses have been paid. This includes things like rent, salaries, inventory costs, marketing expenses, etc. Turnover is simply the total revenue generated by a business – it does not take into account any expenses.

Why is Turnover Important?

There are a few key reasons why it’s important for business owners to understand their company’s turnover:

  • Turnover shows how much money your company is making. This number can be used to compare your company’s performance to other businesses in your industry
  • Turnover can help you understand which expenses are eating into your profits. If your costs are rising faster than your sales, you’ll need to find a way to cut back.
  • Turnover can help you make decisions about where to invest your money. If you know how much revenue your company is generating, you can better allocate your resources to areas that will generate the most return. For example, you may decide to invest in marketing if your sales are low, or in new products, if your sales are high.

What is a “Good Turnover”?

There is no one-size-fits-all answer to this question, as it depends on the industry you’re in and the size of your company. However, as a general rule of thumb, a company’s turnover should be at least double its operating costs.

If your company’s turnover is below this threshold, it may be difficult to make a profit. This doesn’t mean that you can’t be successful with a low turnover – there are plenty of small businesses that do just fine. But it does mean that you’ll need to be extra careful with your expenses, and find ways to generate more revenue.

turnover vs profit

What is the Difference Between Turnover and Profit?

Turnover is different from profit in a few key ways:

  1. Turnover only measures revenue (sales) while profit also takes into account expenses.
  2. Turnover is a measure of how much money your company is bringing in while profit is a measure of how much money your company is keeping.
  3. Turnover is a lagging indicator, which means it tells you how your company has performed in the past. Profit is a leading indicator, which means it can predict future performance.
This means that you may have a negative profit margin, but a high turnover. For example, if your company spends a lot on marketing or inventory, your profits may be low, even though your sales are high.

Why Turnover Is Not Always a Good Measure of Business Health

There are a few reasons why turnover might not be the best measure of your business’s health:

  • Turnover doesn’t take into account expenses. This means that a company with high turnover but high expenses might not be as profitable as a company with lower turnover and lower expenses.
  • Turnover can be skewed by one-time events. For example, if you launch a new product and it’s a huge hit, your company’s turnover will go up, but that doesn’t necessarily mean that your business is doing well and will be able to sustain that level of sales.
  • Turnover is a lagging indicator, which means it tells you how your company has performed in the past, but not necessarily how it will perform in the future.

How to Increase Company Turnover

There are a few things you can do to increase your company’s turnover. The right tactics will depend on your industry and your business, but here are a few ideas to get you started:

  1. Find new markets to sell to – If you’re only selling to one market, you’re missing out on potential revenue. Look for other markets that might be interested in your product or service.
  2. Focus on bringing in more customers – This can be done through marketing and advertising, or by offering discounts and promotions. For new businesses, in particular, it’s important to get as many people in the door as possible.
  3. Increase your prices – This will obviously only work if your product or service is in high demand and people are willing to pay more for it. If you do raise your prices, make sure to do it gradually so you don’t alienate your existing customer base.
  4. Focus on selling more to your existing customers – This is often easier and cheaper than acquiring new customers or moving into new markets, and it’s a great way to increase loyalty and customer lifetime value. There are a number of ways to do this, such as upselling and cross-selling, or simply providing excellent customer service.
  5. Increase your product or service offerings – This is a great way to boost sales, but it’s important to make sure that you’re not spreading yourself too thin. It’s also important to make sure that your new products and services are complementary to your existing ones.
  6. Focus on increasing the average order value – This can be done by adding new, higher-priced items to your product line, or by bundling several products together. You will first need to build trust in your brand before you can start selling more expensive items, but it’s a great way to increase revenue.
 

reduce business expenses

How to Reduce Expenses

While increasing your company’s turnover is important, it’s not the only thing you should be focusing on. You also need to make sure that your expenses are under control and that you’re actually making a profit.

There are a few things you can do to reduce your expenses:

  1. Negotiate better terms with your suppliers – This is especially effective if you’re buying in bulk or if you have a lot of leverage. Suppliers are more likely to give you a better price if they know that you’re considering switching to a competitor.
  2. Cut unnecessary costs – This might include things like subscriptions and memberships that you don’t use or reducing the amount of stock you are holding at any one time. It is a common mistake for new businesses to overspend in the early days, so it’s important to be mindful of your expenses from the start.
  3. Automate or outsource certain tasks – This can help you save money on labour costs, and it can also free up your time so that you can focus on more important tasks. Many small business owners are experts in their field but don’t have experience in areas like accounting or marketing, so outsourcing these tasks can be a great way to save money and get expert help.
  4. Use technology to your advantage – There are many software programmes that can help you save money by automating tasks or by reducing the need for paper documents.
  5. Take advantage of tax deductions and government incentives – This can be a great way to save money, but it’s important to make sure that you’re eligible for the deductions or incentives before you claim them.
By following these tips, you can increase your company’s turnover without overspending or putting your business at risk. Just remember to focus on quality and profit, not just quantity.

How Turnover Can Affect Your Investment Potential

If you are seeking new investment in your company you will need to present your business plan and accounts to potential investors. There are various ways that your current turnover can affect your investment potential, both positively and negatively:

  • A high turnover can be a positive sign to potential investors as it indicates that your company is in demand and doing well. However, if your expenses are also high then this could offset the positives of a high turnover and make investment less likely.
  • A low turnover can indicate that your company is not in demand or is struggling. This is often a negative sign for potential investors. However, if your expenses are also low then this could offset the negatives of a low turnover and make investment more likely.
  • Investors will also be interested in how you plan to increase your turnover. If you have a solid plan for growth then this can be a positive sign, even if your current turnover is low.
It’s important to remember that turnover is just one factor that potential investors will consider when deciding whether or not to invest in your company. They will also look at your business plan, your accounts, and your management team. However, if you have a strong case for investment then a high turnover can be a positive sign that will help you attract the attention of potential investors.

Reasons Promising Businesses Often Have Initially Low Turnovers

There are a number of reasons why businesses with high potential often have low turnovers when they first start out:

  1. It takes time to build up a customer base – It is only natural that you will not have too many customers from the outset unless you are in a high niche market. It takes time to market your business and make people aware of what you’re offering.
  2. It takes time to establish yourself in the market – If you’re starting a new business then you will be competing against established businesses with more brand recognition. It can take time to build up your reputation and attract customers away from your competitors. This is why competitor research is such an important step in the planning process.
  3. High-quality products or services often take longer to produce – New businesses often lack the manpower or the resources to produce high-quality products or services immediately. It can take time to build up your production capabilities and establish yourself as a producer of quality goods or services.
  4. New businesses often have higher overheads – When you start out you will most likely have to invest more in marketing, rent, and other overheads. This can eat into your profits and leave you with a low turnover. As you begin to establish your business and increase your sales volume, you can then begin to reduce and renegotiate your overheads.
  5. It takes time to develop efficient systems and processes – Many new business owners do not have the experience or the knowledge to set up efficient systems and processes immediately. This is why it is important to identify areas where you are lacking in experience and seek advice from those who can help you.
All of these factors can contribute to a low turnover for new businesses. However, this doesn’t mean that they are not promising investments. If you have a solid business plan and you’re confident in your ability to overcome these challenges then a low turnover can actually be a positive sign for potential investors.

increase turnover

Final Thoughts

As you can see, understanding about turnover is a key part of running a business but there are many other more important factors to consider. Turnover is very limited in providing a true picture of a business’s health. Use it as one of many indicators to give you a fuller understanding of your business and never make important decisions based on turnover alone.

Topic

Finance

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