Turnover vs Profit
Turnover and profit are both terms that appear on a firm’s balance sheet. Turnover and profit are related to one another since profits are calculated by reducing expenses from the total revenue, of which a major portion is made of the company’s sales turnover. There are however a number of differences between the two. The article provides a clear explanation on each term and shows the similarities and differences between turnover and profit.
Turnover
Turnover is the income that a firm generates through trading its goods and services. Sales turnover measures how much of the company’s finished goods are sold within a week, month, 6 months, a quarter or a year. Determining a company’s turnover will help manage production levels and ensures that finished goods are not left idle in warehouses for extended periods of time. What is being considered as turnover will depend on the type of business that the firm is in. For retail businesses, turnover will be the sales of the goods that are sold, and for a company that offers business consultancy services this will be the value of the fees charged for successful proposal it wins. The turnover will include the company’s total trading income, including those that arise from activities that are not considered to be core operations of the business. For example, a company that sells computers and laptops will record their turnover as the total amount of computers sold within the year. However, they will also record income that they receive from support, maintenance, and aftercare services.
Profit
A profit is made when a firm is able to make sufficient income to surpass its expenses. The term ‘profit’ is used as opposed to surplus because the firm in reference is operating with the sole concern of making a profit. The profit made by a firm is calculated by reducing all the expenses (utility bills, rent, salaries, raw material costs, new equipment costs, taxes, etc.) from the total income that a firm produces. Profits are important for a firm because it is the return that business owners obtain for bearing the costs and risks of running the business. Profits are also important because it provides some idea of how successful the business is, and can help attract external funding. Profits can also be reinvested in the business, to grow the business further and which will then be called retained profit.
What is the difference between Turnover and Profit?
Turnover and profit are both items that appear on a company’s profit and loss statement. Turnover is an important component used in calculating the company’s profit, as the turnover makes up the largest portion of the company’s income. There are, however, a number of differences between the two. High turnover is an indication that the business is growing, and the demand for the company’s goods and services are increasing. High profits indicate financial stability and business success. An investor will want to see both turnover and profits grow, but growth in turnover may not necessarily mean the company is making profits since the costs may still be quite high.
Summary:
Turnover vs Profit
• Turnover and profits are both terms that appear on a firm’s balance sheet.
• Turnover is the income that a firm generates through trading its goods and services.
• A profit is made when a firm is able to make sufficient income to surpass its expenses.
• Turnover is an important component used in calculating the company’s profit, as the turnover makes up the largest portion of the company’s income.
• High turnover is an indication that the business is growing, and the demand for the company’s goods and services are increasing while high profits indicate financial stability and business success.
• Growth in turnover may not necessarily mean the company is making profits since the costs may still be quite high.