Annual turnover or business turnover is the total sales your business has generated over a financial year. This amount excludes expenses and costs of goods sold (COGS). Annual turnover represents the output of your activities and is the starting point for many businesses to evaluate their operations.
Annual turnover: meaning and why it is important
Annual turnover is the figure you first look at when you’re evaluating a business, as it is an expression of how valuable your business is. From turnover you can then evaluate the profit of your business via different methods, such as total income minus expenses (net profit).
While annual turnover is important, it only tells part of the story. High turnover doesn’t necessarily equate to a successful business. How you determine a stable business is by comparing turnover against specific metrics, such as costs to do business or other expenses. For instance, you could have high annual turnover (great), but your operating margins are also high (bad), meaning that your profit is low, which could lead to poor cash flow. You should use annual turnover against other metrics, depending on the business activity.
Other things that annual turnover assists with:
- Sales and marketing strategies
- How close you are to sales targets
- Income generated by certain services and products
- Business value and financial health
- Gross and net profit
Annual turnover example
A boutique florist operating for a couple of years is looking to find their annual turnover from previous years. From their accounting software, they pull up their sales report and find the total amount of sales:
| Revenue | 2024 | 2023 | 2022 |
|---|---|---|---|
| Flower sales | $372,000 | $321,500 | $295,420 |
| Other | $17,050 | $12,500 | $8,400 |
| Total Sales |
$389,050 |
$334,000 |
$303,820 |
From the reports, the florist business owner can see that from 2022 to 2024, they have seen an increase in sales from $303,820 to $389,050. This is an increase of annual turnover by 28.05%, showing that the business is growing in terms of gross revenue. The owner is confident that they will have even better annual turnover for 2025, and creates annual sales targets for 2026.
Calculating annual turnover
Calculating annual turnover is simple. What you do is count up the total sales figures over 12 months in the financial year, and you have your annual turnover.
Difference between turnover and profit
Turnover comes before your profit calculations. With profit, you use annual turnover as your starting figure, and you calculate your gross profit, operating profit, and net profit by subtracting a set of financial indicators/factors (COGS, expenses, interest, and tax).
Annual turnover vs employee turnover
Turnover is a blanket term that can be used not only for your sales but also for a business’s employee or labour turnover. Depending on the industry, employee turnover varies. For example, in supermarket retail, there is a high employee turnover in comparison to a specialised industry like mining.
Annual turnover and your business
Annual turnover refers to your total income over the financial year. Annual turnover will help you determine your gross profit and net profit against costs and expenses. It will also assist you when making operational decisions like projecting sales targets for the following year, determining costs, and assessing the profitability of your business.
See related Terms:
What is income?
What is gross profit?
Net profit vs gross profit
