How to Calculate Your Company’s Turnover: A Guide for Growing Businesses in the UK
Company Expense Policy Guide
Understanding and calculating your company’s turnover is fundamental to measuring its financial health and developing its strategic planning. For business leaders in growing UK businesses, a firm grasp of turnover is crucial. While you may already be familiar with employee turnover, it’s sales turnover that paints a picture of the company’s business performance. This article provides a clear guide on how to calculate turnover, its importance, and how it can impact your business and its bottom-line profit.
What is turnover? The two main types
In business, ‘turnover’ can have various distinct meanings. The most common one refers to sales turnover, which represents the total revenue a business generates from its sales over a specific period. It is a key indicator of your company’s performance and size as it grows. Think of it as the total income received from selling goods or providing services before deducting any costs. While considering turnover, it’s important not to confuse turnover with profit. Profit is rather what’s left after all expenses, including the cost of goods sold and operational costs, are subtracted from the turnover.
Another type of turnover is employee turnover. This measures the rate at which people leave an organisation, whether voluntarily or involuntarily, over a set time. While a high employee turnover rate can be indicative of issues with company culture or management, this article will focus on the financial aspects of sales turnover. For a deeper dive into staff retention strategies, you can read more about employee turnover here.
How to calculate annual turnover: a step-by-step guide
Calculating your company’s annual turnover is a straightforward process. The formula is simple:
Annual Turnover = Total sales of goods and services in a 12-month period
Here is therefore a simple step-by-step guide on how to calculate a company’s turnover:
Define the period: You need to choose a specific time frame, noting the start and end dates. Most commonly, this is the financial year, but you can also calculate turnover on a quarterly, half-yearly or monthly basis, in order to track performance more closely.
Sum all sales: Add up the total value of all sales invoices and receipts generated during that period.
Exclude VAT: If your business is VAT registered, you must subtract the VAT amount from your total sales. The turnover figure should only reflect the income your company keeps.
Examples of turnover calculations
For example, let’s consider a small consulting business in the UK. In a financial year, it invoices clients for a total of £250,000. All of this work is subject to 20% VAT. The VAT amount is £50,000. Therefore, the company ’s annual turnover is £200,000.
While we are focusing on sales turnover here, it’s useful to know other turnover formulas, such as how to calculate accounts payable turnover. This calculation shows how quickly a company pays its suppliers. The formula is:
Accounts Payable Turnover = Total supplier purchases / average accounts payable
A higher ratio indicates prompt payments, which can be beneficial for supplier relationships.
The importance of knowing your turnover rate
So, why is sales turnover so important for making business decisions? Well, your sales turnover rate is a direct measure of your business’s sales performance. It indicates the demand for your products or services and the effectiveness of your sales team and marketing strategies. For growing businesses, a rising sales turnover signals expansion, while a declining turnover rate should prompt a strategic review. Accurate turnover data is therefore essential for forecasting, budgeting, and securing funding and investments, and making sound financial decisions. Check out our article on mastering financial data in a startup for more guidance.
Factors, benchmarks, and improving your turnover rate
Several factors can affect your company’s sales turnover rate, including evolving market demand, economic conditions, competition, and pricing strategies. Industry standards for turnover rates can vary significantly. A retail business will likely have a much higher turnover than a high-end manufacturing firm, so it’s important to compare your rates to relevant industry benchmarks.
If you want to improve your company’s turnover rate, focus on strategies to increase sales. This could entail enhancing your marketing efforts, exploring new markets, introducing new products or services, or focusing on customer retention and customer relationship management to encourage repeat business. Effective financial management can also help. Robust cash flows allow you to invest in growth opportunities, such as staff training and new technologies. You can learn more about this in our article on the importance of good cash management to support growth.
By regularly calculating and analysing your total turnover, your organisation will be better equipped to navigate the challenges of a growing business in the UK, and to make informed decisions that drive success and boost profit.
