Business turnover is a term you have probably heard a great deal but what does it actually mean? And more importantly, what are the implications for your company?
Here’s our handy guide to what qualifies as turnover and why keeping track of this is essential.
A basic definition
The easiest way to understand turnover is to use the basic explanation from the Companies Act, which defines turnover as “the amount derived from the provision of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes.” This might sound rather complicated but essentially all it means is money that you have invoiced customers for goods you have delivered or services you have provided, minus some deductions. Turnover is calculated over a period of time, so your annual turnover is the value of goods or services provided in a one-year period. Costs that you pass onto your customer such as shipping or expenses are also part of your turnover.
What’s not included
Your turnover is the value of your sales to your customers, minus any discounts that you may have given them and not including VAT. Any money your business receives from investments is not included in your turnover. It is also worth noting that turnover is the amount that you have provided or sold in the particular period, including anything that you have invoiced for regardless of whether you have received any payments.
Why is it important?
The reason that correctly calculating your business turnover is vital is because it will have implications when it comes to submitting your yearly accounts and calculating your tax. Once a year your accounting firm will need to prepare your figures, which will determine the amount of tax you have to pay and whether you are also liable for VAT. Raising a large invoice on your last few weeks or days of your company year will increase your turnover and therefore tax implications so you need to understand whether that increased turnover and profitability is more important than a reduced tax bill for that year. The turnover of your business is what is used to decide whether or not you have to pay VAT. The current VAT threshold is £82,000 per year, so if your sales turnover is near this figure it is really important to be accurate in calculating it correctly. If you don’t, you might run the risk of failing to register when in fact you do need to do so, which can lead to difficulties further down the line.
Knowing your business turnover is an essential part of running your own firm. Not only will it help you keep track of your sales and possibly enable you to expand successfully, but it is also a major factor in calculating the value of your business, should you decide to sell at a later stage.