Generally, the difference between turnover vs revenue seems straightforward. As these are commonly used as interchangeable terms and in some cases, they refer to the same thing. Most often, they mean the total income of a business that is generated by selling goods and services in a certain period. However, there are differences that you need to know as a small business owner in the UK.
Let’s explore the difference between them…
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Turnover vs Revenue: Differences
According to the Companies Act 2006: Turnover is the amount that a company receives by selling the goods and services as an ordinary business practice after deducting trade discounts, VAT, or other taxes. Turnover is the first figure that is displayed on the income statement of a business.
But it’s not that simple. Sales turnover includes items that a business might not consider as revenue, like reimbursing the travel expense of a client.
Turnover and revenue are not the same always. The total business turnover can be divided into three categories: staff turnover, inventory turnover, and sales turnover.
Measuring staff turnover is not an easy task as it is not directly related to the revenue. Inventory turnover metric shows how frequently a company has sold and replaced its inventory during a certain time. The faster a business uses its inventory, the quicker it’ll make cash. Sales turnover has a direct relationship with revenue.
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Let’s see what is revenue. Revenue is the amount of money a business receives by selling a number of goods or services. The new UK GAAP define revenue in FRS 102: The gross inflow of economic benefits in a certain time while doing ordinary activities that result in an increase in equity. This does not include new share capital.
Though this definition looks similar to turnover, it’s not the same. Sometimes, revenue is not derived from selling goods and services. For example, the companies dealing with the financials sector may generate income from investment capital which HMRC doesn’t classify as turnover. For this reason, financial sector industries don’t consider revenue and turnover the same.
Quick Wrap Up
Complications arise when you’re differentiating turnover vs revenue, but knowing them is crucial for effectively operating your business. Although, both terms are not exactly the same but they do have a correlation. A business can earn more if it turns over its inventory frequently at a fast pace. However, you should note that it does not always guarantee the profitability of a business. For instance, if a company sells its inventory quickly at a clearance price, it will increase its revenue and turnover rate but it will generate less profit as the goods are sold at a cheaper price (clearance price). As a result, the revenue generated by frequently turning over inventory doesn’t generate sufficient profit.
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Disclaimer: This blog provides general information on the differences between revenue and turnover.