From cash flow to profitability, there are lots of metrics that can provide a picture of the financial health of your business. Together, they all help you understand how you’re tracking, what’s working and where there’s room for improvement.
Annual turnover is just one of the key markers you can use to get a good idea of how well your business is performing each year.
But what exactly does annual turnover mean and how can you calculate it? Here’s a quick explainer.
So, what exactly is annual turnover?
Annual turnover usually refers to the total income made by a business over a year. It’s sometimes also called ‘gross revenue’ or ‘total sales’.
Keep in mind there are some other definitions of annual turnover that don’t refer directly to sales. For example, annual inventory turnover measures how many times inventory is replaced over the course of a year. Annual employee turnover is a measure of how many employees leave a business in a year.
For the sake of this article though, we’ll be focusing on the most common definition of annual turnover – yearly income from sales.
You can find out more about other types of business turnover in our guide for small business owners.
Turnover is a measure of total income from sales, whereas profit is total income minus expenses.
For example, if a business makes $100,000 in sales over a year, its annual turnover is $100,000.
However, if the cost of materials, labour and all other business expenses is $60,000, then the business’s profit is $100,000 - $60,000 = $40,000.
Comparing turnover against profit can help you gauge how your expenses are impacting your bottom line and ability to grow, and whether you need to make any adjustments to achieve a better balance.
Annual turnover is an important indicator of your business’s performance because it tells you plainly and simply how much money you’re bringing in from selling your goods or services.
This is not only gives you a picture of your business’s overall financial health but can also help you figure out things like:
It’s also helpful to compare annual turnover against other metrics. For example, if your net profit is low in comparison to your annual turnover, it might be time to find ways to lower your Cost of Goods Solds (COGS) or other business expenses. Or, if your annual turnover is solid but you don’t have much cash on hand, you might look at strategies to improve your cash flow.
As long as your accounting records are up to date, calculating annual turnover is as straightforward as adding together your total sales for the year.
For example, let’s say a candle making business sells 1,200 candles over the financial year at $12 each.
A simple calculation of annual turnover would be:
1,200 candles x $12 = $14,400
In reality, most annual turnover calculations aren’t as simple as this example because businesses often sell multiple goods and services at different prices.
That said, with accounting software like QuickBooks Online, you can automatically record all sales transactions in one place so you always have an overview of your revenue. You can also generate a customised report in a few clicks to review your annual turnover whenever you need to.
