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Sales turnover - more than vanity
Episode 15412th February 2023 • I Hate Numbers • I Hate Numbers
00:00:00 00:08:50

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Sales turnover, or simply turnover is misunderstood, with differing opinions on its usefulness in measuring financial success.  Turnover is more than a vanity metric, it provides valuable insight into the performance and health of a company.

When looking at business turnover, it’s important to understand

  • Firstly, what it is
  • Secondly, how it's measured
  • Thirdly, its strengths and limitations

Looking examining business turnover provides an overall snapshot of how your company performs financially. It’s an easy way to see sales figures across an extended period of time, allowing you to identify trends and potential areas of improvement. With this information at hand, you can better prioritize the strategies that will ensure the best return on investment for your business.

In addition, understanding your business turnover can also provide invaluable insights into customer behavior. By analyzing data over time, you can determine which products and services are most popular among customers, which may help inform decisions about future marketing campaigns or product releases. This level of understanding is essential for any successful business and can be achieved by closely monitoring your turnover rate.

Looking at sales turnover offers many advantages, there are some limitations as well.  For example, it doesn’t take into account profits or losses from different transactions, and profit is more important than sales!  Furthermore it is not an accurate financial reflection of your business situation .

Conclusion and good to know

Overall, understanding business turnover is key for any successful business owner or entrepreneur. You gain valuable insights into how well your company is performing financially.  As a measure of true financial success, it lags behind profit.

The I Hate Numbers podcast covers a range of topics to help serious business owners thrive, let alone survive.  From financial storytelling to tax, and more!  Every episode provides actionable advice from me, business finance coach, accountant and educator. Subscribe to keep in touch, contact me if you want my help for your business

Are you a small business owner, social enterprise or organisation passionate about change? Managing your finances can be a lot of work, trust me.  Finally, there’s software that makes keeping track of your cash flow and financial planning easier: Numbers Know How.



This podcast uses the following third-party services for analysis:

Chartable - https://chartable.com/privacy

Transcripts

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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

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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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