Your business ‘turnover’ is not your ‘profit’, though often we find the two can be confused.
‘What is turnover?’ is one of those questions candidates get asked on Dragons Den, and many business owners on the show get muddled trying to explain it.
We get why! It’s one of those jargony words you feel like you should have known when you started your business, and may have felt too embarrassed to ask your accountant about ever since. Like when you forget someone’s name and years down the line have to avoid them on the street because you left it too long to be reminded.
Well, you don’t need to avoid us! We know you’re not interested in learning accounting terms. It’s bigger than that.
The reason we want to make sure you understand your ‘turnover’ is so you’re able to know your key business numbers at all times.
Knowing your numbers means you’re empowered to make decisions, take opportunities, avoid pitfalls. We’d hate for jargon to get in the way of you feeling in control of your business.
In the UK, revenue or sales are often called ‘turnover’- but it may include things you don’t expect
According to the Companies Act, turnover is:
“The amount derived from the provisions of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes”
What does that mean in plain English? Your turnover is basically:
- The total amount you bill to your customers
- LESS any discounts
- LESS any VAT
That means that your turnover includes a couple of things you might not expect, for example:
- Amounts you bill for shipping is part of your turnover
- Your total turnover is the total amount BEFORE you take off commission or PayPal fees
- If you bill your customer for expenses, that is also part of your turnover
It’s these things that differentiate your turnover from your profit. Your profit refers to your earnings after any expenses have been deducted.
You’ll need to calculate your turnover correctly to register for VAT
Including all of this is important.
The number that determines when you have to register for VAT is your turnover. If you are close to the VAT registration threshold (currently £85,000 over a rolling 12 period) and you are not calculating your turnover correctly then you risk not registering when you are legally required to do so.
How to calculate it correctly
If you use Xero then working out your turnover for the last 12 months is actually pretty easy. You need to find the Profit and Loss report and set the date range for 12 months. If you are running it in July then set it to run from 1 July last year to 30 June this year. Your sales should be at the top of the report.
One other thing to remember is that your turnover number should be based on when you actually provide the goods or services, not when you invoice it or when you receive the cash for it. It also doesn’t include income from investments, e.g. interest and dividend income, as that is not from the provision of goods or services.
When you know what the data means, you’re on the path to big wins
It’s exciting when you know what’s going on in your business, isn’t it?
Now you confidently understand your turnover, you can work out your profit. When you know your profit, you can think about whether you’re reaching your targets, whether you need to make more sales, or improve productivity inside the business.
That’s why helping our clients get and understand their data is one of the most fundamental things we do here at Starfish Accounting.
We use the data to help you make marginal improvements in your business, so you get some easy wins! Those incremental easy wins lead to bigger wins… and all of a sudden you’re running the kind of business you dreamed of at the start.
It all starts by breaking down the jargon and misconceptions, and really opening the door to your numbers. If you’re as excited about that as we are, let’s chat.
