What is the difference between Turnover and Profit?
The turnover of a business is the amount of revenue it has earned in a particular accounting period.
The profit of a business is the amount remaining after deducting from the turnover the expenses incurred in earning it.
A difference between turnover and profit is that a rising turnover may be a sign that the business is growing but profit is the indicator of the “health” of the business. You are in business to make a profit, otherwise the business will eventually fail. Increased turnover does not guarantee rising profits, particularly if the business is unable to control costs.
Where do the business real profits come from?
The relationship between turnover and profit depends on the industry in which the business is operating
It is not always obvious where the business real profits come from. For example Petrol stations and supermarkets must maintain a high annual turnover to ensure they make adequate profits. Other types of business, such as clothes retailers or furniture stores are making a high margin on sales and may earn a satisfactory profit on a lower turnover. Restaurants make their highest margins on drinks, whereas pubs make their money on food.
It is important that businesses can tell the difference between revenues and profits, and understand the role and contribution of each product and service line from both these perspectives. Note, for many companies, while their core business puts them on the map and brings in the customers, it’s their more peripheral, value –added activities that generate the profits.
It is vital that Management must take into account the effect these decisions will have on both turnover and profit. To grow a business, management must not focus only on increasing turnover, it also must look at controlling costs and thereby, increasing profits.
Continuation of a loss making product line will increase turnover but it will increase costs even more and therefore reduce profits.
Which would you prefer – a company with a 5m turnover making $100,000 profit a year or a business with a turnover of $500,000 making $200,000 a year?