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iStock 901863898
iStock 901863898

Why Small Business Owners Must Understand Turnover and Its Importance

By Gary Prince, Chief Strategy Officer at SimplyPayMe.

According to SmallBizGenius, ‘80% of small businesses get through their first year, half of all companies survive more than five years, whilst only a third reach the 10-year mark.’

With such statistics to contend with, it is vital that SMEs actively monitor and use the metrics available to them – turnover and net profit are possibly the most important. But why?

A business assertion states that the best way to measure a company’s success is through its net profit, which provides a solid bottom line to work from. Net profit considers a company’s income, the costs of goods and services, admin and tax. Moreover, calculating your turnover is an excellent opportunity to understand your business and identify areas that need attention.

What is turnover in business? And how does it differ from revenue?

It is crucial to understand the terms “turnover”, “profit”, and “revenue”, as they are often used interchangeably.

Turnover is your total business income during a set time, i.e. the net sales figure – the total sales made within a fixed period, including shipping fees, installation services, or warranties, for example.

Profit refers to the money left after deducting all expenses – the cost of goods and services, VAT, and other overheads.

Revenue refers to the total amount of income generated by the primary operations of a business.

But what can turnover tell you that net profit and revenue can’t?

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Why is it essential for SMEs to understand business turnover?

Turnover is of great use during your business’s lifecycle, especially when looking for improving areas or wanting to value your company for a potential sale. Thus, turnover can provide valuable insights into two main areas:

  • Financial wellness – Analysing turnover determines an enterprise’s financial health by exhibiting its cash flow. A low turnover implies a business has less available money, which affects its operations. For example, decrease your sales cost by renegotiating contracts with suppliers if your gross profit is low and your turnover is high. Alternatively, if your net profit is low and your turnover high, you can make your business financially efficient to meet your target profit.
  • Investment preparation – Turnover can help a business or person determine the risk of financing a company. Low turnover means a higher investment risk, indicating that a business manages its funds poorly. On the other hand, a high turnover shows a lower investment risk as the company rapidly sells its service or products to customers, revealing a healthy cash flow.

To add to these points, understanding your turnover can be integral to your insurance. If you exceed your maximum insurance policy, any future claims could be rejected – devastating for any business viability.

How to best calculate business turnover

The next step is knowing how to calculate your business turnover. And as long as you keep clear and detailed sales records for a given time, it should be relatively easy.

Whether your business deals in product sales or services, your turnover will be the total value to pass through your books at any time. Once your turnover is calculated, you can use that figure to calculate your gross profit: simply subtract the cost of goods or services sold; or if you want to calculate your net profit, just subtract your operating costs.

While most companies calculate their turnover annually as part of their tax return, it is also beneficial to assess your monthly turnover – particularly when looking for areas to improve or planning an investment pitch. Furthermore, it is essential to pay attention to your turnover in periods of instability – such as a recession or economic downturn. Such information allows for informed and quick decisions.

Understanding your business’ turnover is a simple way to take control and get the most from your metrics. Turnover is a crucial indicator of a business’s performance. Calculating and understanding a business turnover can help you identify the areas that need improvement, secure investments, value your company and determine its fiscal wellness.

So, while taking steps to monitor turnover may seem like yet another drain on your time, it is an essential step to ensure your enterprise’s wellness.

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