When comparing sales turnover vs profit, it is easy to give turnover more importance than it deserves. A growing sales figure can tell us useful things about a business, but it does not automatically mean the business is financially successful.

Turnover tells us the value of the goods and services we sell. Profit tells us what remains after we account for the relevant costs. Cash tells us something different again, because money arriving in the bank may not match the sales made during the same period.

In this episode, we look at what sales turnover actually means, how we measure it, why it is useful and why turnover can become a vanity metric when we use it as the main measure of business success.

About this episode

People sometimes dismiss turnover as vanity.

There is some truth in that, particularly when somebody uses sales alone to judge whether a business is successful.

However, turnover is still an important business number.

It helps us understand the level of activity in the business, provides a reference point for profitability, supports pricing decisions and can help us measure how efficiently customers pay us.

The problem is not turnover itself. Problems arise when we expect turnover to tell us something it cannot.

If you want the basic definition first, see our guide to turnover in business.

What is sales turnover?

Sales turnover is the total financial value of the goods and services we supply to customers over a particular period.

For example, imagine a retailer sells 100 calculators at £10 each.

The sales turnover is:

100 × £10 = £1,000

The same principle applies if you sell services rather than products.

If you sell your time, expertise or intellectual property, the value of those services contributes to your turnover.

We can measure turnover across different periods, including days, weeks, months, quarters and years.

Turnover is not the money in your bank account

This is one of the most important distinctions.

Sales turnover is not simply the amount of money that appears in the bank.

Suppose you provide £1,000 of goods to a business customer and give them 30 days to pay.

You have made the sale, but the cash may not arrive until the following month.

If a trade discount reduces the final selling value to £900, that adjusted amount becomes the relevant sales value. When the customer later pays £900 into the bank, the payment does not suddenly create the turnover. It simply collects money from a sale you made earlier.

Payment providers can make the distinction even clearer.

If you make a sale and the payment provider deducts a transaction fee before sending the remaining money to your bank, the amount received into the bank is not necessarily the same as the value of the sale.

This is why we need to understand turnover and cash separately.

For more on that distinction, see How Different Is Cash to Profits?.

Sales turnover vs profit

Turnover and profit answer different questions.

Turnover asks: how much did we sell?

Profit asks: what did we make after accounting for the relevant costs?

A business can generate impressive turnover and still make very little profit.

Equally, a product with lower sales value may generate more profit than another product if producing and delivering it costs much less.

That is why turnover alone cannot tell us whether a business is financially successful.

If you need the profit foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Turnover, profit and cash are different numbers

MeasureWhat it tells us

Turnover

The value of goods and services we sell.

Profit

What remains after we account for the relevant business costs.

Cash

The money actually flowing into and out of the business.

These numbers are connected, but they are not interchangeable.

A sale can increase turnover without immediately increasing cash. Higher turnover can also fail to increase profit if the additional sales are expensive to produce or deliver.

Looking at all three gives us a much stronger picture of business performance.

Why is turnover still useful?

If turnover does not measure financial success on its own, why bother tracking it?

Because it gives us an important reference point.

Using turnover to understand sales activity

Turnover tells us the financial value of what the business is selling.

Tracking that figure over time can help us see whether sales are increasing, falling or remaining relatively stable.

How turnover helps measure profitability

We need turnover to calculate several important profit measures.

Without knowing the value of sales, we cannot properly understand margins or how much profit those sales generate.

Turnover as a pricing reference

Sales turnover gives us a useful reference point when assessing whether our pricing works.

We recover the cost of supplying goods or services through the prices customers pay. Looking at turnover alongside costs and profit helps us judge whether those prices make financial sense.

Measuring how quickly customers pay

If you offer customers credit, turnover can also help us measure how efficiently we collect money.

One useful measure is receivables days, which is simply a way of asking:

How long, on average, are we waiting for customers to pay us?

The turnover figure provides an important reference point for that calculation.

Using turnover in financial planning

Turnover is also a useful starting point when planning ahead.

If your accounting system records sales properly when you raise invoices or deliver work, you can monitor sales patterns and use that information when building forecasts and business plans.

When does turnover become a vanity metric?

Turnover becomes vanity when we treat a large sales number as proof of financial success.

A business owner might proudly say the business has reached £500,000 or £1 million of turnover.

But that number alone does not tell us what the business owner actually made from it.

We still need to consider the costs of generating those sales.

Those costs might include manufacturing, staff, freelancers, marketing, distribution, payment charges, professional fees and other business expenses.

Once we account for those costs, the profit may tell a very different story.

That is why the size of the sales number should never be confused with the quality of the business.

What should we use to measure financial success?

Turnover belongs in the picture, but it should not dominate it.

For financial success, profit and cash are generally much more revealing.

Profit tells us whether the business creates financial value after costs.

Cash shows us whether that value translates into money the business can actually use.

Turnover helps explain where those numbers start, but it does not tell the whole financial story.

If financial terminology sometimes feels unnecessarily complicated, our guide to Understanding Financial Terminology explains several common terms in plain English.

FAQs

What is sales turnover?

Sales turnover is the total value a business generates from selling goods and services over a particular period.

How does turnover compare with revenue?

In everyday UK business language, people often use turnover and revenue to describe income generated from normal business sales. The exact terminology can depend on the context.

How is turnover different from profit?

Turnover measures the value of sales. Profit measures what remains after we account for the relevant costs.

Why is turnover different from cash received?

A business may make a sale today but receive payment later. Turnover relates to the sale, while cash relates to when money actually moves into or out of the business.

Can a business have high turnover and low profit?

Yes. A business can generate large sales but still make little profit if producing, delivering and supporting those sales costs too much.

Why should I track turnover?

Turnover helps us monitor sales activity, calculate profitability, assess pricing, measure customer payment performance and support financial planning.

Episode Timecodes

• 00:00 - Why turnover is more than vanity
• 01:27 - What business turnover means
• 01:47 - Defining sales turnover
• 02:35 - How we measure turnover
• 03:18 - Credit terms, discounts and the timing of turnover
• 03:56 - Why bank receipts are not turnover
• 04:46 - Why turnover is useful
• 05:15 - Profitability, pricing and customer payments
• 06:22 - Why cash and turnover are different
• 06:44 - Turnover versus profit and financial success
• 08:04 - Final takeaway

Related episodes and guides

• What Is Turnover in Business?
• What Is Profit? Gross Profit and Net Profit Explained
• How Different Is Cash to Profits?
• Understanding Financial Terminology

Key takeaway

Sales turnover matters, but we need to understand it in context.

It tells us how much we are selling and gives us an important reference point for pricing, profitability, customer payments and financial planning.

However, turnover is not the same as profit, and it is not the same as cash.

A bigger sales figure does not automatically mean a stronger business.

Use turnover to understand activity. Look at profit to understand what the business makes. Then use cash to understand what money the business actually has available.

Together, those numbers give us a much clearer picture of financial success.

Plan it, Do it, Profit.

Further Support

If you want to explore your sales, profit, cash flow and other business numbers, use our free online business calculators.

If you need help understanding your turnover, profitability, cash flow or wider business finances, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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It is often said that turnover is vanity. That certainly has merit to it, but turnover is more than that. Turnover is more than just pure vanity. And in this week's I Hate Numbers Podcast, I'm going to be looking at business turnover, and I'm gonna be focusing on these following areas. I'm going to look at what business turnover actually means, how business turnover is actually measured, why business turnover is a

important measure. And finally, where business turnover represents vanity.

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm a business finance coach, accountant, tax advisor, and author of over 28 years. And in those 28 plus years, I've helped thousands of businesses increase their financial awareness, make more profits in their business, reduce their stress and anxiety, and have the business lifestyles they desire.

And I want that for you. Let's crack on with the podcast. Now, business turnover is one of those fancy terms that's banded around in the world of business. It has some confusion, some misunderstanding about what it actually is. So I think it's really important to focus on initially what does that term actually mean. Now, turnover is used in a number of different contexts.

Here I'm relating specifically to what's called sales turnover, and that relates to the value in total of the goods and services that you are selling to your customers. So a retailer that's selling luxury I Hate Numbers calculators, for example. If they sell 100 of those calculators being charged at 10 pounds for each one, that gives them a total value of 1000 pounds.

That is the value of their turnover. That turnover can be measured in days, in weeks, in months, in quarters, years, or on a much longer time period. If you are somebody who sells your time, your intellectual property for money, and I hope you do, then the value of those hours that you sell aggregated together is your turnover.

Now turnover, that's what it actually means, is a financial value placed on the goods and services that you are supplying to your customers. Now, how is it actually measured? And there is some confusion here. Many people confuse turnover with money that's being paid into their bank account, and that isn't actually correct.

Turnover is the monetary or financial value of those goods and services before, and I emphasize the before, commission has taken off those numbers before expenses are considered before we take off any things like card transaction fees. And the other thing to remember is money that's paid into your bank could relate to sales that you've made previously.

So if you are a business that's giving credit terms to your customers, you sell those luxury I Hate Numbers calculators I referred to earlier on, you sold them for a thousand pounds. You sold it to a business customer. You may give them 30 days to pay that bill. You may also offer them a discount for a bulk purchase.

Now, the value of that turnover that might be paid in 30 days time, less any trade discount that you might be giving, that's the value of your turnover. So if I gave them a 10% discount, I'm expecting to receive 900 pounds. When that 900 pounds gets paid into my bank account, the money paid in isn't my turnover.

It's based on when the work was delivered, when the product was sold. That's the trigger point for measuring the turnover. Now, it's important also to remember if that money is paid in via an online payment service, that payment service is likely to take commission off that transaction. Strictly speaking, turnover is going to be the value of that sale prior to any commissions, bank charges, and the like being taken over.

And that's really important, by the way, because of things like VAT registration and getting more accurate calculations on margins, et cetera. Now also what you have to bear in mind, business turnover is measured before we add on sales taxes or V A T, and that is the value of the sales turnover. Now, why is that important?

Well, it's important because it helps us measure profit more accurately. It sets benchmarks and the like. So as I drift into my third point within the, what is business turnover and why it's more than vanity, turnover or why some people may refer to it as selves is the value of the transaction. And within that figure, I am recouping back from my customer, from my clients, the costs of providing those goods and services to them.

So it's a good reference point to make sure my pricing is correct. The turnover figure is also needed to work out things like profitability. The figure for turnover is also used as a guide and a reference point to see how efficient I am in terms of collecting my monies from my customers. If I'm giving credit facilities, I'm gonna be waiting till I get that money in the bank, or that money in the bank is really important here.

So actually working out your receivables days, another bit of jargon there for you, which just means how long I have to wait to get paid by my customers. Then I need that reference point. It's also an easy-ish number to identify if you've got good accounting systems, which capture the value of your sales as you generate the invoice.

You can more easily see the value of your turnover, and therefore that's a good part of your financial planning process. It's also a number that we can mostly identify with this. Most people, even if they're not financially literate or financially aware or recognize what sales actually are, but remember folks, don't confuse that with money getting paid into your bank account.

Cash and turnover are two disconnected numbers. Now, finally, right at the very beginning of the podcast, I mentioned that in some people's eyes, turnover is vanity. Now I share that sentiment if you are using that as a measure of your financial success. Financial success to me is measured in two key numbers.

It's measured in profitability and it's measured in cash, how much cash is being generated and ending up in your bank account and it's left for you. Now, profit by the way, folks, is not the value of the turnover, and that's why sales can be a vanity metric. It's very possible that you could generate more profit of products that are generating a smaller sales value because the costs in connection with those items may be much smaller.

So the vanity comes by saying financial success is not on the value of the sales that are being made, not the value of the overall turnover, but how much profit you are making. So once you take costs of delivery, cost of manufacturer, cost of providing that service, whether that's employment costs, freelancers, marketing costs, distribution costs, bank charges, professional fees, et cetera.

Once those are taken off, we know how much profit we have generated. And for me, profit is a much better insightful metric on success than turnover can ever be. So folks, let's just summarize what we've said. We've talked about what business turnover is really important to understand what that represents, how it's measured, why it is still an important metric, and finally why it represents

vanity. Using that as a measure of success is definitely not one of the top measures you should be using. I hope you got some value from this podcast. I hope you found it useful. If you have, I'd love to hear your thoughts, your comments, and do you measure your business turnover. And until next week, folks, happy measuring.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.