How to calculate turnover for your company

Turnover is an accounting metric that tells you about your business’ income. In the UK, it specifically refers to the total amount you make from sales minus VAT and discounts. If you’re asking “What is the turnover of a company?” or you want to know how to calculate your business’ turnover quickly and accurately, we’ve got the details and the formula you need right here.

What is turnover in business?

In the simplest terms, turnover is the total amount of money your business receives for its products or services over a set period, minus what’s referred to as “discounts and tax”. It’s usually tracked monthly, quarterly, or for the financial year.

The legal definition, which comes from the Companies Act of 2006, defines turnover as “amounts derived from the provision of goods and services falling within the company's ordinary activities, after deduction of (a) trade discounts, (b) value added tax, and (c) any other taxes based on the amounts so derived.”

In this definition:

• Trade discounts are the special prices that you offer to some groups of customers (for example, if your staff buy your products with an employee discount). They need to be deducted from your turnover calculation because it only considers the money that was actually paid to you.
• Value-added tax (VAT) is the tax added to goods and services sold in the UK. Not all business owners in the UK will pay VAT – it’s only once you pass a certain threshold, which we’ll discuss later – but the standard rate of VAT is currently 20%.
• Other taxes apply to certain types of businesses that have to pay tax on the products they sell. Before you calculate your turnover, it’s important to know that the taxes you pay on your profits don’t fall into this category because you need to know your turnover before they can be calculated.

What is the formula to calculate turnover?

Here’s how turnover is calculated in the UK:

Total amount of annual sales – VAT and applicable taxes – trade discounts = annual turnover

For example, imagine you have a shop where you sell and mend electronics, and you provide £180,000 of goods and services over the financial year.

When it’s time to calculate your turnover, you subtract the VAT you charged for the products (20% of £180,000 is £36,000), leaving £144,000.

Then, you subtract the total discounts given on products and services – say £6,000 – leaving a taxable turnover of £138,000.

Turnover calculation: What not to include

To calculate your turnover correctly, it’s also important to know what not to include. Your business will have a lot of expenses to cover, but they only come into play when you start to calculate your profits.

First, the total sales in your turnover calculation only refers to the money you made from your main trading activities. For example, if you run a plumbing business, it’s the money you make from the jobs you do for your clients. You shouldn’t include money you made, for example, from interest on your business bank account or from selling your old equipment or business vehicle.

Then, in terms of tax, you only subtract VAT and any product-specific taxes your business has to pay. It’s very common for new business owners to ask whether turnover is before or after tax. The answer is that it’s after VAT but before other taxes like income tax on your profits.

Finally, you can’t subtract expenses like payroll, rent, or utilities from your sales before you calculate turnover. These come next, as you switch from finding out your turnover to finding out how much profit your business made.

What does annual turnover mean?

In some ways, turnover alone isn’t enough to determine how successful your business has been in a certain period. But, once you start to use your turnover in other calculations, you can get a much more detailed understanding of how healthy your business is.

Let’s look at what your turnover means for your business by examining three ways in which it’s commonly used. 

1. Turnover helps you calculate your business’ profit

Your business can (and should) measure profit in two ways: gross profit and net profit. You need to know your turnover to get started here.

• Your gross profit is your turnover minus the cost of goods and services (known as COGS in accounting terms). COGS refers to the costs of making, obtaining, or providing the product you sell, like the cost of raw materials and labour.
• Your net profit is your gross profit minus all the other operating expenses for your business, like payroll, loan repayments, rent, utility bills, and administrative costs.

Once you compare your profits to your turnover, you have a much more accurate indication of how your business is running than you do with turnover alone.

For example, if your turnover is high but your profits are low, it can be a sign that you’re not changing enough. On the other hand, if your turnover is increasing year on year and your profits remain high, you could consider expanding your business or investing more of your profits.

2. Lenders and insurers analyse your turnover when you make an application

When you apply for a grant for your business, discuss a business loan with a lender, or get insurance for your business, they’ll want to look at your accounts. Your turnover plays a role in the calculations that lenders and insurers make when they consider your application.

It’s worth noting that the gap we discussed above – where your turnover is high but your profit is low – can be a warning sign to insurers and lenders. Put simply, if you don’t have as much of a “cushion” of profits, your business is more vulnerable to changes in regulations or unexpected events. This means they might charge more for insurance, or charge a higher interest rate on a loan, because they see it as a bigger risk to have your business on their books.

3. Turnover tells you when you need to register for VAT

Turnover is an important metric for all businesses in the UK, even sole traders with very small businesses. This is because your taxable turnover determines when you have to start paying VAT (and therefore, charging it to your clients).

You have to register for VAT within 30 days of the month when you went over the VAT threshold (which is a turnover of £90,000 in the last 12 months at the time of writing).

It’s really important to know where this threshold lies if you run your own business or you’re thinking of starting one. It can mean big changes to the way you price your services, and you have a very limited time to make these adjustments once you reach the threshold.

Other types of business turnover to know

In this post, we’ve spoken about turnover as a measure of how much money your business is making. Sometimes, the term “turnover” is used in other business contexts too:

• Employee turnover is the rate at which employees leave your company. It’s often seen as a measure of how satisfied the staff members are with the business. The formula to use here is number of existing employees / average number of total employees = employee turnover rate.
• Inventory turnover is how long it takes to sell the inventory you have in stock. To calculate this figure (and make your orders more accurate), use the formula cost of total goods sold / average value of inventory = inventory turnover.
• Accounts receivable turnover can refer to the rate at which customers pay off their debts to your company.

What does annual turnover mean? Quick summary

If you’ve kept an accurate record of your sales, it’s relatively simple for most small businesses to calculate turnover. Just add together your total sales of products or services over a certain period and remove the 20% that goes to HMRC and any trade discounts you’ve given.

Knowing your turnover gives you a solid foundation for understanding your business’s revenue and its performance over time. With this number, you can assess your business growth, prepare more accurate financial reports and forecasts, apply for loans and insurance, and make sure you’re operating in line with the latest VAT regulations in the UK.

Every growing business needs protection. Learn more about our business insurance options at Howden and get started today.

Also read:

• What is liability insurance?
• Types of business insurance you should know about
• Small business grants to be aware of in the UK
• Can a sole trader have employees?
• How to register as self-employed in the UK

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