When comparing sales turnover vs profit, it is easy to give turnover more importance than it deserves. A growing sales figure can tell us useful things about a business, but it does not automatically mean the business is financially successful.
Turnover tells us the value of the goods and services we sell. Profit tells us what remains after we account for the relevant costs. Cash tells us something different again, because money arriving in the bank may not match the sales made during the same period.
In this episode, we look at what sales turnover actually means, how we measure it, why it is useful and why turnover can become a vanity metric when we use it as the main measure of business success.
About this episode
People sometimes dismiss turnover as vanity.
There is some truth in that, particularly when somebody uses sales alone to judge whether a business is successful.
However, turnover is still an important business number.
It helps us understand the level of activity in the business, provides a reference point for profitability, supports pricing decisions and can help us measure how efficiently customers pay us.
The problem is not turnover itself. Problems arise when we expect turnover to tell us something it cannot.
If you want the basic definition first, see our guide to turnover in business.
What is sales turnover?
Sales turnover is the total financial value of the goods and services we supply to customers over a particular period.
For example, imagine a retailer sells 100 calculators at £10 each.
The sales turnover is:
100 × £10 = £1,000
The same principle applies if you sell services rather than products.
If you sell your time, expertise or intellectual property, the value of those services contributes to your turnover.
We can measure turnover across different periods, including days, weeks, months, quarters and years.
Turnover is not the money in your bank account
This is one of the most important distinctions.
Sales turnover is not simply the amount of money that appears in the bank.
Suppose you provide £1,000 of goods to a business customer and give them 30 days to pay.
You have made the sale, but the cash may not arrive until the following month.
If a trade discount reduces the final selling value to £900, that adjusted amount becomes the relevant sales value. When the customer later pays £900 into the bank, the payment does not suddenly create the turnover. It simply collects money from a sale you made earlier.
Payment providers can make the distinction even clearer.
If you make a sale and the payment provider deducts a transaction fee before sending the remaining money to your bank, the amount received into the bank is not necessarily the same as the value of the sale.
This is why we need to understand turnover and cash separately.
For more on that distinction, see How Different Is Cash to Profits?.
Sales turnover vs profit
Turnover and profit answer different questions.
Turnover asks: how much did we sell?
Profit asks: what did we make after accounting for the relevant costs?
A business can generate impressive turnover and still make very little profit.
Equally, a product with lower sales value may generate more profit than another product if producing and delivering it costs much less.
That is why turnover alone cannot tell us whether a business is financially successful.
If you need the profit foundation, see What Is Profit? Gross Profit and Net Profit Explained.
Turnover, profit and cash are different numbers
| Measure | What it tells us |
|---|---|
| Turnover | The value of goods and services we sell. |
| Profit | What remains after we account for the relevant business costs. |
| Cash | The money actually flowing into and out of the business. |
These numbers are connected, but they are not interchangeable.
A sale can increase turnover without immediately increasing cash. Higher turnover can also fail to increase profit if the additional sales are expensive to produce or deliver.
Looking at all three gives us a much stronger picture of business performance.
Why is turnover still useful?
If turnover does not measure financial success on its own, why bother tracking it?
Because it gives us an important reference point.
Using turnover to understand sales activity
Turnover tells us the financial value of what the business is selling.
Tracking that figure over time can help us see whether sales are increasing, falling or remaining relatively stable.
How turnover helps measure profitability
We need turnover to calculate several important profit measures.
Without knowing the value of sales, we cannot properly understand margins or how much profit those sales generate.
Turnover as a pricing reference
Sales turnover gives us a useful reference point when assessing whether our pricing works.
We recover the cost of supplying goods or services through the prices customers pay. Looking at turnover alongside costs and profit helps us judge whether those prices make financial sense.
Measuring how quickly customers pay
If you offer customers credit, turnover can also help us measure how efficiently we collect money.
One useful measure is receivables days, which is simply a way of asking:
How long, on average, are we waiting for customers to pay us?
The turnover figure provides an important reference point for that calculation.
Using turnover in financial planning
Turnover is also a useful starting point when planning ahead.
If your accounting system records sales properly when you raise invoices or deliver work, you can monitor sales patterns and use that information when building forecasts and business plans.
When does turnover become a vanity metric?
Turnover becomes vanity when we treat a large sales number as proof of financial success.
A business owner might proudly say the business has reached £500,000 or £1 million of turnover.
But that number alone does not tell us what the business owner actually made from it.
We still need to consider the costs of generating those sales.
Those costs might include manufacturing, staff, freelancers, marketing, distribution, payment charges, professional fees and other business expenses.
Once we account for those costs, the profit may tell a very different story.
That is why the size of the sales number should never be confused with the quality of the business.
What should we use to measure financial success?
Turnover belongs in the picture, but it should not dominate it.
For financial success, profit and cash are generally much more revealing.
Profit tells us whether the business creates financial value after costs.
Cash shows us whether that value translates into money the business can actually use.
Turnover helps explain where those numbers start, but it does not tell the whole financial story.
If financial terminology sometimes feels unnecessarily complicated, our guide to Understanding Financial Terminology explains several common terms in plain English.
FAQs
What is sales turnover?
Sales turnover is the total value a business generates from selling goods and services over a particular period.
How does turnover compare with revenue?
In everyday UK business language, people often use turnover and revenue to describe income generated from normal business sales. The exact terminology can depend on the context.
How is turnover different from profit?
Turnover measures the value of sales. Profit measures what remains after we account for the relevant costs.
Why is turnover different from cash received?
A business may make a sale today but receive payment later. Turnover relates to the sale, while cash relates to when money actually moves into or out of the business.
Can a business have high turnover and low profit?
Yes. A business can generate large sales but still make little profit if producing, delivering and supporting those sales costs too much.
Why should I track turnover?
Turnover helps us monitor sales activity, calculate profitability, assess pricing, measure customer payment performance and support financial planning.
Episode Timecodes
- 00:00 – Why turnover is more than vanity
- 01:27 – What business turnover means
- 01:47 – Defining sales turnover
- 02:35 – How we measure turnover
- 03:18 – Credit terms, discounts and the timing of turnover
- 03:56 – Why bank receipts are not turnover
- 04:46 – Why turnover is useful
- 05:15 – Profitability, pricing and customer payments
- 06:22 – Why cash and turnover are different
- 06:44 – Turnover versus profit and financial success
- 08:04 – Final takeaway
Related episodes and guides
- What Is Turnover in Business?
- What Is Profit? Gross Profit and Net Profit Explained
- How Different Is Cash to Profits?
- Understanding Financial Terminology
Key takeaway
Sales turnover matters, but we need to understand it in context.
It tells us how much we are selling and gives us an important reference point for pricing, profitability, customer payments and financial planning.
However, turnover is not the same as profit, and it is not the same as cash.
A bigger sales figure does not automatically mean a stronger business.
Use turnover to understand activity. Look at profit to understand what the business makes. Then use cash to understand what money the business actually has available.
Together, those numbers give us a much clearer picture of financial success.
Plan it, Do it, Profit.
Further Support
If you want to explore your sales, profit, cash flow and other business numbers, use our free online business calculators.
If you need help understanding your turnover, profitability, cash flow or wider business finances, you can contact us for an initial chat.
You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.
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