Is Your Focus on Turnover, Forgetting Profit?

Many business owners confuse the importance of turnover and profit, but it’s vital to understand the clear differences between the two, or you could find yourself in a whole host of financial trouble.

Turnover is the money you bring in, the amount you generate from sales over a specified period. Turnover is one metric that can be used to measure the health and performance of your business, and a very important number, but it’s not the same as profit.

Profit is the money you make, i.e., your sales minus your costs. Let’s say you bring in £100,000 per year, but spend £50,000 – your profit is £50,000. Then you have to pay tax, let’s say it’s £10,000, so your business has made £40,000, not £100,000.

Understanding your net profit after tax is important, because that is how much is left for you to take home or re-invest. It’s crucial that you understand this concept in order to maximise your profits.

Of course, increasing turnover can boost your profit dramatically, but you shouldn’t automatically assume that this is the case. For example, if you increase your turnover by £10,000 that sounds great, but if it costs you £20,000, it’s not.

Many businesses reduce their price to increase business volume, but as a general rule this is not a good plan. Did you know that if your gross margin is 30% (quite typical), and you discount your price by 10%, you need to increase sales by 50% to make the same profit as you did before you started discounting? Don’t fall into the trap of being a busy fool!

Understanding the difference between turnover and profit gives you a clearer picture of how much money you’re actually making and how much you can afford to invest.

In time, this allows you to understand which costs and practices generate the largest Return On Investment (ROI). This helps you know the costs you can cut down on to increase your profit margin.

It also helpful to understand the concepts of Gross Profit & Gross Margins, & how we get from Gross Profit to Net Profit After Tax (what’s left for you).

Sales – Costs of Sales = Gross Profit, then:

Gross Profit – Overheads – Tax = Net Profit After Tax

Briefly there are two types of cost:

Costs of Sales – those costs that you need to make the sale.

Overheads – other costs for example: rent, rates, telephone…

If you are thinking of embarking on a sales promotion involving any sort of discounting its good to check your Gross Profit will still be more than your Overheads plus Tax.

Round up & action points

Brush up on your knowledge of these terms: Turnover, Gross Profit, Overheads & Net Profit. Work out how much you need to sell to Break-Even each month.

Review your sales price and costs to see if there are any opportunities to increase profit margins.

If you need some help on this PM or email me on josef@jezltd.co.uk