What is the definition of turnover in the business world?

Turnover is the most basic indicator of a company's success. It's arguably one of the simplest indicators to use to obtain a fast image of how a company is doing, but don't overthink it. While many firms are losing money, they have a high turnover rate. Let's take a closer look at what the phrase means in the context of self-employment in the United Kingdom.

What is the definition of business turnover?

Turnover is easier to compute than profit, and it can provide a rapid snapshot of a company's success, but it isn't always a fair indicator of its health. It's possible that, while revenue is increasing year after year, profit is dropping to the point where the company is losing money. As a result, when you hear high turnover figures, consider them with a grain of salt. However, because it is the beginning point for determining how much tax you may owe, let's take a closer look at what it entails.

What are some other names for turnover?

The HMRC uses the term "turnover," however it can be referred to by a variety of other terms, including "total sales."

• Gross revenue

• Total earnings

• Gross revenue

• Revenue

• Gross Profit

• Sales on a net basis

• The bottom line

Keep in mind that various accountants may use different language to describe turnover.

So, what exactly is turnover?

Simply said, turnover is the amount of money your company has made over a period of time. Not the amount of profit made, but the total of all your company's sales. As previously stated, you can make a lot of money while simultaneously losing a lot of money. Consider purchasing a million T-shirts at a cost of £10 each and selling them all for £1. You've just become a millionaire! You've 'turned over' a million pounds... but you've also lost £9 million, which is obviously not as good.

Let's use the example of a candy store

• You have no money in your bank account when you wake up.

• You sell a lot of sweets and make £500 in a single day.

• Your revenue was £500.

• Let's pretend you needed to withdraw £100 from the till to buy additional sweets.

• What was your profit margin? The sum was still £500.

• However, your cost of sales was £100, leaving you with a profit of £400.

What if you earned £500 every day for a year? Isn't that an annual turnover of £182,500? That's not entirely true. When you make more than the VAT threshold (currently £85,000), things get a little more tricky. You'll have to add VAT to the price of your goods whenever you start charging it. However, because the VAT isn't yours — it belongs to HMRC – you usually describe "turnover" as an ex-VAT figure. Congratulations, you're now a tax collector who isn't getting paid!

What if you don't have any cash on hand?

Things are very straightforward if you only trade in cash. Your turnover is most likely equal to the sum of your large cash wad. What if, on the other hand, you invoice clients and are paid on credit terms? You might, for example, allow your clients 30 days to pay their invoice. So, how do you figure out how much money you've made in a specific time period? Is it calculated based on the invoice date or the day you were paid? That's an excellent question!

Cash Basis — Turnover is calculated based on the date you received the funds.

Accruals Basis - even if you haven't been paid yet, your turnover is calculated based on the date you billed your customer.

Consistency is key!

It makes no difference whether you report on a Cash Basis or an Accruals Basis for your internal management accounts. Assuming you don't have a large number of debtors (those who haven't paid you yet), it should all work out. When it comes to statutory accounts, though, it's a totally different storey. If you don't use the proper accounting firms reference dates, you'll be in big trouble! One of the many reasons why having a professional accountant is so vital!

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