Turnover vs profit: the difference, with a worked example

Short answer: turnover is the total value of what your business sold in a period, before any costs come off. It means the same as revenue or sales, and if you are registered for VAT or GST it excludes the tax. Profit is what is left after costs: gross profit takes off the direct cost of what you sold, net profit takes off every cost. A business can have a big turnover and almost no profit, or a small turnover and a large one. Turnover tells you how busy you are; profit tells you whether being busy pays. In Xero’s Profit and Loss, turnover is the Total Trading Income line at the top and net profit is the Net Profit line at the bottom.

Turnover, gross profit and net profit

Term	How to work it out	What it tells you
Turnover (revenue, sales)	Everything you invoiced or sold in the period, excluding VAT or GST	How much business you did
Gross profit	Turnover − cost of sales	Whether your prices cover what each sale costs you
Net profit	Gross profit + other income − overheads	Whether the business as a whole made money
Net margin	Net profit ÷ turnover × 100	How many pence or cents of each sale you keep

“Turnover” is the usual word in the UK and Australia, and the one UK company accounts use. Americans say revenue. Be careful with the other meanings: staff turnover (people leaving) and stock turnover (how often you sell through your stock) have nothing to do with sales.

A worked example: a bike workshop in Bristol

These figures are made up, exclude VAT, and assume all sales are standard-rated at 20%. A bike repair workshop’s year:

Line	Amount
Turnover	240,000
Parts and tyres (cost of sales)	84,000
Gross profit	156,000 (65% of turnover)
Wages	96,000
Rent	30,000
Other overheads	18,000
Net profit	12,000 (5.0% of turnover)

What the numbers say

1. £240,000 of turnover, £12,000 of profit. The owner keeps 5p of every pound customers pay (before tax). A one-person bookkeeping practice with turnover of £80,000 and £22,000 of costs makes £58,000, a 72.5% margin: a third of the turnover, nearly five times the profit. Turnover alone says nothing about which business is doing better.
2. More than £240,000 went through the bank. Customers paid £288,000 including VAT, and £48,000 of that belongs to HMRC. The bank balance in a busy quarter looks healthier than the business is.
3. Turnover from more jobs lifts profit fast. If the workshop does 10% more jobs at the same prices and its staff can fit them in, turnover rises by £24,000 and parts by £8,400, so gross profit rises by £15,600. Overheads do not change, so net profit goes from £12,000 to £27,600, up 130%. The fixed and variable costs guide explains why.
4. Turnover from discounts can wipe profit out. Cut every price by 10% to win work, and on the same number of jobs turnover falls to £216,000 while parts still cost £84,000. Net profit becomes −£12,000. To earn the same £156,000 of gross profit at the lower prices, the workshop would need 18.2% more jobs just to stand still (156,000 ÷ 0.55 = 283,636 of work at the old prices, against 240,000). The price increase calculator runs the same sum in both directions.

When turnover matters more than profit

Some rules look at turnover, not profit, so a business making little or no profit can still cross them:

• UK VAT registration: you must register once your VAT-taxable turnover goes over £90,000 in any rolling 12 months (not your accounting year), or is expected to in the next 30 days on its own. A decorator with £94,000 of sales over the last 12 months and £31,000 of profit has to register. The VAT threshold calculator adds up your last 12 months and shows the month you are on track to go over.
• Australian GST: registration is required once your GST turnover is $75,000 or more (current or projected over 12 months). The GST threshold works both tests through for a growing business.
• New Zealand GST: registration is required once sales go over, or are expected to go over, $60,000 in 12 months.

Lenders, insurers and the size bands for company accounts also ask for turnover. Your accountant will tell you which apply to you.

Where to find turnover and profit in Xero

1. Open Accounting › Reports › Profit and Loss and pick the period (a month, a quarter or the last 12 months).
2. Turnover is the total of the income section at the top, usually headed Trading Income (some organisations show Income or Revenue). If you are VAT or GST registered the figures exclude the tax.
3. Other Income below it (bank interest, grants, insurance payouts) is income but not usually turnover, because it is not from selling.
4. Gross Profit follows Cost of Sales, and Net Profit is the last line. In Xero that is usually profit before income tax, which your accountant adds at year end (profit before tax explains).
5. For the rolling 12 months the VAT test uses, run the Profit and Loss by month for the last 12 months and add up the sales lines, or use the Xero sales report to see sales by customer and item.

On the default accrual basis, turnover is what you invoiced, whether or not customers have paid. On a cash basis it is what was received. Cash vs accrual reports in Xero shows when the two differ, and how to read a profit and loss in Xero goes through every other line.

Common mistakes

• Treating turnover as money you have. Costs, VAT or GST, and customers who have not paid yet all sit inside it.
• Celebrating turnover growth without checking margin. If gross margin fell while turnover rose, the extra sales may be earning little. Check the margin for both periods (gross profit vs net profit); the sales growth calculator shows whether profit kept up with turnover.
• Including VAT or GST in turnover. Registered businesses report turnover without the tax. Bank deposits include it.
• Counting Other Income as turnover. Interest, grants and asset sales are not sales.
• Using the accounting year for the VAT threshold. HMRC’s test is any rolling 12 months, checked at the end of each month.

Common questions

Is turnover the same as profit? No. Turnover is the total value of your sales before any costs. Profit is what is left after costs are taken off: gross profit after the direct cost of sales, net profit after every cost.

Is turnover the same as revenue? Yes, in everyday use. Turnover is the usual word in the UK and Australia and revenue is more common in the US, but both mean the total sales of the business in a period, excluding VAT or GST if registered.

Can a business have a high turnover and make a loss? Yes. If costs are higher than sales the business makes a loss however large its turnover. Heavy discounting, rising supplier prices and overheads that grow faster than sales are the usual causes.

Does turnover include VAT? Not for a VAT-registered business. Turnover is reported excluding VAT, because the VAT you charge is owed to HMRC. In the example above, £288,000 was received but turnover is £240,000.

Is the VAT threshold based on turnover or profit? Turnover. You must register once your VAT-taxable turnover goes over £90,000 in any rolling 12-month period, even if the business makes little or no profit.

Where is turnover on a Xero Profit and Loss? At the top: the total of the Trading Income section (or Income, depending on your chart of accounts). Other Income further down is not usually counted as turnover.

See turnover and profit every Monday

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