Why you can’t always trust your turnover

A guest blog from Margot Clarke - margotclarke.co.uk

Turnover is the amount of money that your business receives from the sale of your goods or services. It’s quite often the only figure that many business owners look at as a key indicator of business performance.

So, is it the most important figure of all the business figures and are business owners right to focus their attention on it alone?

The answer is that whilst it’s a good indicator of how well your business activity in one period compares to another (for example the current month to the previous month or the current tax year to the previous tax year) it is not in any way a reliable indicator of how well your business is doing overall. Why? Because the proof of the pudding is the profit (or what accountants like to call the “bottom line”) which is the result of total sales (incomings) less total expenses (outgoings).

A good example of this are two clients that I’ve been working with. During 2021 one of them, a manufacturing company, recorded a turnover of £1.1m whilst the other, a graphic designer, recorded a turnover of £50K. If you were to rely on turnover alone as a measure of success, you’d assume that the manufacturing company was the more successful of the two but what if I were to tell you that the manufacturing company had outgoings of £1,075,200 whereas the graphic designer had outgoings of only £18,400? That meant that the profit for the manufacturing company worked out at only £24,800 whilst the one for the graphic designer was greater at £31,600. So which was the more successful business overall? This is why you should never take turnover at face value and why you should never have turnover envy. If another business is making more turnover than you then do not assume that their profits are any better than yours.

Whilst there is good reason for monitoring your turnover to know how much money to expect from your customers for all your hard work always be aware that if your business is spending too much money then any cash that you receive will not stay in your bank account for very long. And no matter how many sales invoices you churn out being profit poor, and even worse cash poor, will result in you, as the business owner, taking the brunt financially.

So, what do you do if you’re happy with your turnover but not with your profit or your bank balance? Rest assured that there’s always scope for improvement but, however tempting it may be, the first port of call is not to go out chasing new customers, taking on more work and churning out more invoices. Converting leads into new customers, plus any additional work emanating from it, involves a lot of time and effort for what will not necessarily bring great improvement to your business finances. If a lower-than-expected profit stems from an inherent problem in your spending policy then an increase in turnover could compound rather than resolve the issues. The first port of call should instead be to sit down, take a deep breath and have a good look at what you’re spending your money on. You may not relish the prospect of doing this but it’s far quicker to make monetary gains by reducing your outgoings than it is to go chasing more incomings.

Margot provides business support to a variety of companies across a wide range of industry sectors. With an international background, she is highly experienced in helping business owners understand what’s really going on in their business.

If you’re struggling to understand your numbers, Margot’s thorough approach to accounting allows you to control your cash flow and manage your figures, so you can meet your business objectives. 

To explore every which way to boost those all-important profits please get in touch with Margot - margotclarke.co.uk.