What is turnover in business?

In the UK, Section 474 of the Companies Act 2006 describes turnover as the amounts acquired from providing goods or services, after deducting trade discounts, VAT, and other relevant taxes based on the amounts derived.² (external link)

Turnover also usually excludes money from interest or investments, money from selling business assets, and government grants or insurance payouts. It typically includes: 

• Sales of products 
• Income from services and fees
• Subscription income
• Commission
• Customer-paid costs like delivery charges³ (external link)

Turnover reflects the total income your business has generated over a set period.⁴ (external link) Rising turnover can indicate increased sales, stronger customer retention, or effective expansion. It can also help you compare your performance with similar businesses and plan future finances.⁵ (external link) 

Tracking turnover is also important for meeting tax and regulatory obligations. Businesses in the UK report turnover in their financial statements, and certain thresholds trigger additional requirements. For example, if your annual taxable turnover exceeds £90,000, you are required to register for VAT. Not registering on time can lead to a penalty, calculated based on the amount of VAT due and the delay in registration.⁶ (external link) 

Investors and lenders may also want to look at turnover when assessing your business. A healthy turnover figure can make it easier to obtain credit or attract investment.

In many contexts, the terms are used interchangeably. Both terms refer to the total income from business activities. In the UK, turnover is the more common term, referring to income from your main business operations. Revenue is more commonly used in North America and may sometimes include other income beyond sales.⁷ (external link)

Understanding the difference between turnover and profit can help you assess your business’s financial health.

While turnover measures how much money comes into your business, profit shows what's left after paying expenses.⁸ (external link) There are different types of profit: 

• Gross profit – turnover minus cost of goods sold (what you paid to make or buy what you sell). 
• Operating profit – gross profit minus running or operational costs (rent, utilities, marketing, salaries).⁹ (external link) 
• Net profit – total revenue minus all expenses, including taxes and interest.¹⁰ (external link)

Is turnover before or after tax? 

Turnover is measured before tax.

Does turnover include expenses?

No. Turnover only includes income from sales. Running costs are taken away later when calculating profit.

The basic formula is: 

Turnover = Total sales over a specific period (after deduction of trade discounts, VAT, and other relevant taxes)¹¹ (external link)

For example, if a small online shop has product sales of £85,000 (including delivery charges of £3,000), VAT charges of £17,000, and discounts of £2,000, the turnover would be calculated as follows: 

£85,000 + £3,000 = £88,000

£88,000 - £17,000 - £2,000 = £69,000 

Therefore, the turnover would be £69,000.

Gross turnover is the total value of all goods and services sold, before any deductions.¹² (external link) 

Net turnover is turnover after taking away returns, discounts, and allowances.¹³ (external link) When UK businesses report turnover, they typically refer to net turnover.

Recording turnover can be useful when it comes to tax compliance and financial planning. Before calculating turnover, it helps to: 

1. Determine an accounting period: monthly, quarterly, or annually. 
2. Identify revenue sources: product sales, service fees, subscriptions, and commissions. 
3. Keep accurate financial records: use accounting software to log transactions.

What counts as ‘good’ turnover depends on your industry, type of business, size, and stage of growth. A retail business may have high turnover but low profit margins, while a consultancy might have lower turnover with higher margins. 

Growing turnover year-on-year and whether turnover generates enough profit to keep the business running are often key indicators. Comparing your figures with those of similar businesses can help gauge performance.

Beyond sales turnover, several other turnover measures can help assess how efficiently your business operates: 

• Inventory turnover: measures how quickly you sell and replace stock. Higher inventory turnover typically means strong sales and good stock management. 
• Asset turnover: shows how well you use your business assets to generate sales. It's calculated by dividing turnover by total assets. 
• Accounts receivable turnover: shows how quickly you collect payments from customers. A higher number suggests good credit management. 
• Portfolio turnover: relevant for investment businesses, measuring how frequently investments are bought and sold.¹⁴  (external link)

Understanding these different turnover types can provide insights into your business operations and highlight areas for improvement.