What is the Difference Between Turnover and Revenue

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…

Turnover vs Revenue: Differences

According to the Companies Act 2006: Turnover is the amount that a company receives by selling 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 expenses 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.

Revenue

  • Definition: Turnover refers to how many times a company makes or burns through assets.
  • Effect: Affects the profitability of the company
  • Ratios: Revenue is used to calculate Profitability ratios like gross profit, net profit, and operating profit margin.
  • Meaning: Revenue is the total value of goods or services sold by the business
  • Importance: Revenue is critical to understand, as it is one of the vital factors that determine the growth of the company
  • Example: Revenue is calculated as the total amount of computers sold multiplied by the price.
  • Types: Revenue can be of two types operating revenue and non-operating revenue
  • Reporting: It is mandatory to report revenue and the first line item on the income statement.
  • Formula: Revenue = Total sales – Returns

Turnover

  • Definition: Turnover refers to how many times a company makes or burns through assets.
  • Effect: Affects the efficiency of the company
  • Ratios: Turn ratios that are used widely are inventory turnover ratio, asset turnover ratio, sales turnover, accounts receivable, and accounts payable ratio.
  • Meaning: Turnover is the income that a firm generates through trading goods and services.
  • Importance: Understanding the turnover is vital to managing production levels and ensuring that nothing is left idle as inventory for an extended period
  • Example: Turnover means the total amount of computers sold in a year.
  • Types: Turnover may be of three types inventory, cash, and labor.
  • Reporting: It is mandatory to report revenue but is instead calculated to understand the statements better
  • Formula: Cash turnover – Net Sales/Cash Total asset turnover – Net Sales/Average Total Assets Fixed Asset turnover – Fixed Assets/Net Fixed Assets

Impact of Revenue and Turnover on Business

Measuring staff turnover is not an easy task as it is not directly related to the revenue. The 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.

Let’s see what is revenue. Revenue is the amount of money a business receives by selling several 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 increase 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 the same they do correlate. 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.

Are you looking for professional tech-savvy tax advisors and accountants in the UK to guide you? Contact us now!

 

Disclaimer: This blog provides general information on the differences between revenue and turnover.

 

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