Understanding annual turnover: definition, importance, and calculation

Running a business is much like sailing a ship. You need to keep an eye on the horizon and know exactly where you're heading. Whether you’re aiming to cover your operating costs, invest in growth, or expand your product line, knowing your annual turnover helps you set realistic goals and make informed decisions. 

It's like having a GPS for your business journey, showing you where you stand in terms of sales and revenue over a year.

In this article, we'll break down:

• What exactly is annual turnover?
• How do you calculate it?
• Why is it so important for your business?
  

Let’s dive in with the fundamentals of annual turnover!

What is annual turnover?

Imagine you own a bustling bakery that churns out delectable pastries year-round. At the end of the year, you tally up all the money earned from selling those pastries. This total sum is your annual turnover. 

Simply put, annual turnover represents the total revenue generated by your business over the course of a year. It’s the grand total of all your sales before deducting any expenses.

Think of it as the top line of your financial report card.

Note: business turnover is not the same as profit. Turnover is the raw figure of your sales, whereas profit is what remains after all expenses are deducted.

Why is annual turnover important?

Understanding your annual turnover is vital for several reasons:

1. Financial health indicator: just as a doctor checks your vital signs, turnover is a vital sign for your business. It provides a bird-eye view of your business’s overall financial health. A steady or increasing turnover suggests a growing business, while a declining turnover might signal potential problems
   
   
2. Investor attraction: potential investors and lenders often look at turnover to gauge the business’s performance and growth potential. A higher turnover can make your business more attractive for investment
   
   
3. Performance benchmarking: comparing your turnover against industry standards or competitors helps you understand where you stand in the market. It can highlight strengths and reveal areas needing improvement
   
   
4. Tax purposes: knowing your turnover is essential for accurate tax reporting. Different tax regimes and thresholds often use annual turnover to determine tax liabilities
   
   
5. Strategic planning: it aids in strategic decision-making. Understanding your revenue streams and their trends helps in forecasting, budgeting, and planning for the future

How to calculate annual turnover?

Typically, the calculation of annual turnover includes all the money your business earns, whether from selling goods or services, royalties, or any other sources of income.

Let’s go back to our bakery. Suppose in one year, your sales are as follows:

• Q1: $15,000 from selling 3,000 pastries
  
  
• Q2: $20,000 from selling 4,000 pastries
  
  
• Q3: $25,000 from selling 5,000 pastries
  
  
• Q4: $30,000 from selling 6,000 pastries
  

To calculate your turnover, you simply add these amounts together:

15,000 + 20,000 + 25,000 + 30,000 = 90,000

So, your bakery’s annual turnover is $90,000.

Turnover calculation formula

Here’s the formula in its simplest form:

Annual Turnover = Total Sales Revenue

Or, if you prefer a specific breakdown:

Turnover = Units Sold × Average Price per Unit

For our bakery example, this translates into:

Turnover = (3,000 + 4,000 + 5,000 + 6,000) × Average price per pastry

Let’s assume the average price per pastry is $3:

Turnover = 18,000×3 = $54,000

Important experts advise: The turnover calculation based on total revenue ($90,000) is more accurate than the unit-based calculation ($54,000) as it accounts for variations in sales prices and discounts.

‍‍In practice, annual turnover calculations can be more complex, as businesses typically offer multiple products and services at different price points.

Common mistakes while calculating annual turnover

• Including non-operating income: adding income from sources like interest, rent, or asset sales, which should not be part of the turnover
• Inaccurate data: using incorrect sales figures or not updating records regularly.
• Ignoring discounts and returns: failing to account for sales discounts, returns, or allowances which affect total revenue
• Overlooking seasonal variations: not considering the impact of seasonal fluctuations on sales data
• Not differentiating between gross and net sales: confusing gross sales (total sales before deductions) with net sales (sales after deductions like returns and allowances)
• Excluding relevant sales: missing out on including all relevant sales channels or markets

Is annual turnover the same as gross profit?

The terms "annual turnover" and "gross profit" are often confused for the same. However, they are two different concepts and should not be mixed up.

• Annual turnover: the total revenue from sales before any costs are deducted
• Gross profit: the turnover minus the cost of goods sold (COGS). It reflects the profit made from sales after accounting for the cost of producing the goods

For example, if your bakery’s annual turnover is $90,000 and your COGS is $30,000, your gross profit would be:

Gross Profit = 90,000−30,000 = $60,000

Turnover Vs Profit

BONUS TIPS: 

Remember, profit can be measured in two distinct ways:

“Gross profit” is the revenue from sales after subtracting the direct costs of making the goods or services sold. It is often referred to as the sales margin.

“Net profit” reflects the remaining earnings left after subtracting all expenses, including administrative costs and taxes.

Key takeaways 

Annual turnover is more than just a figure; it's a vital compass for navigating your business's course. A rising turnover often signals growth and expansion, while a decline can indicate potential challenges. Businesses can make data-driven decisions to boost profitability and achieve sustainable growth by consistently tracking and analyzing this metric.

Remember, while a substantial turnover is essential, it’s not the sole determinant of success. 

As the adage goes, "Revenue is vanity, profit is sanity." By understanding the nuances between turnover and profit, business owners can make informed choices to drive their enterprises forward.

Struggling to convert your turnover into tangible growth? Stenn’s alternative financing services offer a lifeline for businesses facing cashflow challenges. With flexible solutions designed to fit your unique needs, we can help you bridge the gap and unlock the potential for expansion.

Frequently asked questions

Why is annual turnover important for a business?

Annual turnover is vital because it reflects a business’s size, market presence, and financial health. This information helps shape investment decisions, lending approvals, and strategic planning.

What is excluded from turnover?

Turnover only includes revenue from regular business sales and excludes:

• Interest earned on savings
• Renting out property or equipment (unless your business is in rentals)
• Selling business assets like vehicles or tools
• Funds received from investors or loans