Turnover vs Revenue in the UK – The Guide

Business has many terms that are thrown around interchangeably, and turnover and revenue are two of them. They both relate to the money your company makes, but the crucial difference lies in how the money is divided. Understanding the difference is important in planning throughout the financial period, including taxes and business health.

This guide will go over the fundamentals of turnover vs revenue, the finer details, and the practical effects it has on your business.

The Fundamentals Of Turnover/Revenue

The following is a quick breakdown of these two terms.

Turnover

Turnover represents the total income of a business from all sources over some time:

• Sales turnover – This refers to the main income your business makes through the core product or service. The income that comes from that is considered “sales income”, but only before deductions.
• Inventory turnover – An inventory turnover ratio doesn’t denote how much income is generated by your inventory being sold, but rather, how efficiently you manage your stock. High inventory turnover means you’re selling assets quickly, which in turn allows you to free up capital to use in other areas of your business, such as marketing, product development etc.
• Business asset turnover – Your asset turnover ratio measures how efficiently you convert business assets into sales turnover. It tells you how much each pound you’ve invested into assets has generated. This means high asset turnover translates to high operational efficiency, signalling a high return on investment.
• Cash turnover – The cash turnover ratio measures how efficiently a business uses cash to generate income.
• Other income – Any income made outside of your core business operations, such as interest earned on savings accounts, investments, rental income etc.

Revenue

Revenue is the net figure, meaning it refers to the income a business makes from its primary business activities. If this sounds like sales turnover, it’s close – but not quite. Revenue deals with income made after deducting trade discounts, returns or allowances.

Considering this, revenue can be split into two parts:

• Operating revenue – Anything generated from core business operations.
• Non-operating revenue – This type of revenue regards income from second sources, such as interests on investments or the sale of an asset. It’s not considered a regular or recurring source of income.

Revenue affects all aspects of a company, as it is essentially the overall grading of performance.

Key Differences

The key differences between the two are quite simple – it’s all about scope:

• Turnover – This encompasses all income sources, breaking them down into specific, measurable bits of data.
• Revenue is narrower – Revenue deals with the net profit of the business after all deductions, a more useful and exact figure that dictates its earning and buying power.

Breaking Down Turnover Types

The following list will go into more detail about the different turnover types.

Sales Turnover

Sales turnover is also known as total sales revenue, and it’s a fundamental financial metric. It’s effectively a grading of your overall performance in the market through your core product/service.

Calculating this is easy. The simple formula is as follows: Sales Turnover = Quality of goods/services sold x average selling price.

1. Determine the quantity per product sold during a period.
2. Calculate the average selling price for each product by dividing the total revenue for a product by the quantity sold.
3. Multiply the quantity sold of each product by its average selling price.
4. Sum up the turnover for all products to get total sales turnover.

By comparing sales turnover year by year, and comparing them to other data, you give yourself access to data that can be used for several things:

• Tracking sales growth – Comparing this turnover over time can give valuable insights into the growth trajectory of your business, allowing you to identify trends such as seasonal fluctuations or the success of marketing campaigns.
• Market share analysis – Benchmark your turnover against competitors, and you will be able to understand your position in the market. This gives you a foundation to launch strategies to increase market share.
• Pricing and product decisions – Data from individual products or services help identify top performers and underperformers, allowing you to make better, more efficient decisions in pricing and product development.
• Sales forecasting – Past behaviour is the best predictor of future behaviour, and the sales data provided will illustrate the behaviour of your clientele. Historical sales trends and any variations over the financial period will allow you to prepare to take advantage of predicted upcoming shifts.

Inventory Turnover

Your inventory turnover ratio is a grading of how well your business manages stock. The calculation is as follows: Inventory turnover = cost of goods sold (COGS)/average inventory.

• A clothing retailer has a COGS of £100,000 and an average inventory value of £25,000
• Inventory turnover = £100,000 / £25,000 = 4

It’s effectively an indication of how well you’re selling products, taking into account storage costs and the risk of inventory becoming obsolete. A high inventory turnover also indicates that your capital is not tied in unsold inventory that may or may not be able to be sold. A low turnover, on the other hand, signals that you’re either overstocking or have products that are not in demand.

• Optimising inventory costs – High inventory turnover indicates that your inventory frequently is depleted and replenished, which also means fewer costs associated with storage space, utilities, and insurance.
• Identifying weaker products – Low turnover is synonymous, to many, with poor products. By analysing the data, you can improve the turnover rate by pinpointing the specific weak products and investigating the reasons for the low sales.

Asset Turnover

Your asset turnover refers to how effectively your business uses assets to generate income. Asset turnover = net sales/average total assets.

• A manufacturing company has net sales of £500,000 and average total assets of £1,000,000.
• Asset turnover = £500,000 / £1,000,000 = 0.5

High asset turnover indicates that your investments are making a good return, and operating efficiently, and low asset turnover denotes that assets are being underutilised, or are unable to contribute as much as they otherwise could.

• Identification of underutilised assets – By identifying underutilised assets, you can then adjust to take this into account. This could be due to the excess capacity of equipment/machinery you have on hand, or perhaps you have enough, but the processes are not efficient enough.
• Investment decision evaluation – The analysis of your turnover can help assess the potential return on investment for future assets, considering historical turnover ratios and projected sales growth.

Employee Turnover

Employee turnover affects a lot about your business in both costs and reputation. The cost is quite simple, any who joins the company will incur expenses in the realm of recruitment, onboarding and training new employees. Furthermore, the departures of skilled workers could also mean a huge loss in productivity that’s not so easy to get back.

In terms of reputation, businesses with a high turnover rate are usually seen as poor choices for prospective employees, or temporary at best. Furthermore, internal discord could occur as a result of the turnover ratios, leading people to fear the loss of their jobs or plan for an exit.

Revenue

Revenue is the overall grade of your business’s performance. It is the lifeblood of your business, creating the foundation of your profitability. It includes all income sources, though they’re split into operational and non-operational revenue.

As we’ve already stated, revenue is calculated similarly to sales turnover, only the following is taken into account:

• Gross Sales – Total revenue generated from sales of your products or services, before any deductions. This includes all sales transactions, even those paid on credit.
• Sales returns – Value of products that have been refunded by customers via a full or partial refund.
• Sales allowances – Partial refunds or price reductions that are offered to customers through compensation for issues that don’t warrant a full refund.
• Discounts – Reducing the selling price of a product or service for any reason, such as volume discounts for bulk purchases, promotional discounts to stimulate sales etc.

Turnover vs Revenue – Taxes, Legalities And Analysis

Aside from its use within the interior of a business/company, there are several implications for both UK law and tax.

Turnover And UK Tax Laws

In the UK, turnover determines tax distribution.

• Value Added Tax (VAT) – If your business’ VAT taxable turnover goes beyond the registration threshold, which is £85,000, you must register for VAT. VAT will be charged on sales at this point, collected from customers, and submitted via VAT returns to HMRC.
• Corporation Tax – A limited company’s taxable profits are the foundation for calculating corporation tax, but turnover can indirectly influence tax liabilities. High turnover equals higher profits, higher profits equal a larger corporation tax bill. Understanding and forecasting your turnover essentially means you can better prepare for the bill.
• Making Tax Digital – MTD is an initiative that is aimed at modernising the tax system, and all businesses above the VAT threshold are required to use this compatible software to keep digital records and submit VAT returns that way. If your turnover is high enough, you are mandated under this initiative.

Turnover And Legalities

• Companies Act 2006 – The Companies Act legislation sets the legal requirements for financial reporting in the UK, mandating companies to prepare and file annual financial statements, including an income statement and balance sheet. Revenue is a critical component in these statements, as it provides a clear picture of your core business income.
• Accounting standards – All UK Companies must adhere to Generally Accepted Accounting Principles (GAAP) or UK GAAP when preparing financial statements. These provide guidelines on how to recognise and report revenue, essential for ensuring transparency and compliance with financial regulations that could otherwise adversely affect a business, and the country as a whole.
• Contracts and agreements – Turnover is used in contracts and agreements to determine payment terms and royalties amongst other financial obligations.
• Business valuation – When a business’s value is evaluated, turnover is often a key factor when being considered by investors and buyers. It’s an indication of the company’s profitability, with the company’s size, market position and potential for future growth.

Revenue And Analysis

Whilst the government uses turnover to determine tax obligations, they use revenue to analyse their economy.

Policy Making

• Measuring economic activity – Revenue data across industries and sectors provide a key indicator of overall economic activity and growth. This allows policymakers to determine the GDP (Gross Domestic Product), and it’s a key measure of the total value of goods and services produced in the company. Aggregate revenue affects the GDP, and the data they receive illustrates trends for policymakers to identify strong and weak points, which they can then write policies to contend with.
• Industry Analysis – By analysing the revenue generated by specific industries and assessing their performance and competitiveness, the government can create policies made to target and support sectors for economic balance.
• Income distribution – Revenue data can give insights into income disparities across the UK. The government can identify areas, both geographically and within different income brackets, to stimulate and distribute income.

Company Valuation And Investment

• Public companies – Publicly traded companies have extra reporting duties that ultimately reveal the revenue of said companies, making it a metric that many investors use as a foundation to determine how worthwhile it is to invest.
• Government investments – Governments can invest and support businesses if it helps the country overall. For example, in 2021, the UK Government invested £1 billion in electric vehicle charging infrastructure, with their decision being informed by revenue data showing a growing market for electric vehicles.

Conclusion

Overall, the differences in revenue and turnover are that they act as data to inform the business, as well as the government, on the health of the company. Using that data is imperative, as it effectively shows you where the strengths and weaknesses of your company lie. 

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