What is turnover in business

:: 00:00

Turnover is. Turnover is an extremely popular and common term used in business. It's an official terminology used by limited companies in their accounts, in the tax returns of the self-employed in partnerships, and a common vocabulary term in the world of business. In this short video, I'm going to explain to you what turnover is,

:: 00:22

explain how it's calculated, why it's important for your business, and also why turnover should not be your main financial priority.

:: 00:34

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.

:: 00:58

Hi folks. Welcome to another weekly episode of I Hate Numbers, the show that aims to educate, inspire, inform you with jargon-free information, talks and tips about your best business friend, your numbers. Please feel free to hit the subscribe button, feedback, share the broadcast with those who will need it.

:: 01:15

Help me to help you to help them. If you've got any suggestions for any topics you'd like covered in a future broadcast, then drop me a line and I'll add that to my content mix. Let's crack on with a broadcast. Now, what is turnover? Now your business could be a service business where you are selling your time and expertise for money.

:: 01:35

You could be a manufacturer, you could be a retailer selling physical products, or your business could be a combination of all of those. Let's play around with some numbers and imagine a scenario. Now, whatever you sell, you must decide how much you're going to charge your client for each hour, each project you deliver, each day of your time, each product you sell onto them.

:: 01:56

You get the idea. Now, imagine your business is one of selling food. The price is 20 pounds for each meal, and over the next few days, you sell six of those meals. Now, your turnover is now 120 pounds. That's made up of 20 pounds, which represents the selling price multiplied by how many of those items, those meals that you're selling on. The two combined is 120 pounds

:: 02:24

and that 120 pounds is going to be your turnover. Now, it would work the same that if you are a service business selling your time, however many hours you deliver multiplied by an hourly rate would give you your turnover. Now it doesn't help us that turnover is called different things by different people all over the world.

:: 02:45

If numbers people gets involved, they will come up with a multitude of terms to describe the same thing. Now, the good thing is that these terms mean exactly the same thing. The terms that you may have come across that are quite popular are sales, revenue, income, gross sales, net sales. Those are just some of the examples.

:: 03:06

If you've come across any other terms that I've not mentioned, feel free to feed them back to me. I'd love to know. Let's recap where we are so far. We've looked at what turnover is, we've looked at the different terms used to describe turnover, and we've looked at how we calculate turnover. I now want to talk to you about why it's important to look at turnover, and then, why turnover should not be your main financial priority, which sounds a bit bonkers.

:: 03:33

Now turnover is a big deal because it's the number you can easily identify, or it certainly should be. You can look at your tier roles, your accounting systems, whether they're spreadsheets, digital systems, your invoice book, you know what you have sold. And if you don't, then you need to make sure that you have that information system that can give you that information easily.

:: 03:54

Knowing what you've sold is a big adrenaline rush, it’s a great validation. It's an emotional comfort blanket. It's a measure of success. People buying from us is a good feeling and also goes some way for us having a profitable business. However, and as a big however, turnover should not be your key financial priority.

:: 04:16

Let's revisit our earlier numbers where we had our food business selling six meals at 20 pounds a pop. Now, that was a turnover of 120 pounds. Visualise that 120 pounds going into a bucket. I don’t know why a bucket, but let's say it goes into a bucket. Now, however, you don't get to keep all what's in that bucket because there will be costs of providing those meals.

:: 04:40

You've got to pay out for the ingredients to make the food, the running cost of your business, the ads, the printing, website cost, and paying yourself. Now let's carry on with the numbers. Out of that 120 pounds, let's earmark and take out 40 pounds out that bucket to cover those costs. That gives us now 80 pounds profit.

:: 05:02

So from that 120 pounds, we can see we've made a profit of 80. So the measure of success is not the sales that we've made, the turnover that we've generated, but the profit we are left over with. We haven't quite finished yet. Let's revisit those meals that we sold on, and let's assume we sold two of those on credit.

:: 05:23

What that means is we sold the meal to somebody, but we allowed them time to pay. There were two meals that were sold on credit, so we've received money in the bank, cash in our pockets, equivalent to four meals, so that's 80 pounds. We take out the 40 pounds to cover the costs for the ingredients, the advertising, the printing, and that's 40 pounds left over.

:: 05:46

Now that could create some financial pressures on us cause we may have more bills coming up and we are waiting for that customer to pay us for the meals that we sold. Now, turnover is an easy and emotive measure, but it's also a vanity metric. If you're gonna focus on key numbers, the two key numbers are

:: 06:06

profitability and cash. Now, folks, it's not to say we ignore sales, because ultimately what we charge a customer has to go towards recouping and covering our costs, giving us our reward, and paying ourselves. Now, in next week's podcast, I'm going to take a deep dive into profit and cash. Those two metrics which are important, and there's a strap line that encapsulates all this and it says sales are vanity, profit

:: 06:34

is sanity, cash is reality. So watch out for next week's podcast where we're going to look at profit and cash in a bit more detail. Now, if you found this podcast useful, then I'd love it if you could share the episode on social, leave a review on Apple Podcasts, check out the show notes, and I'll show you a link to some resources where you can do some of the heavy number calculations at a flick of a button.

:: 07:00

Until next week, folks, have a fantastic week. 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.