As a business owner, you’ve probably seen the terms “turnover,” “gross profit,” and “net profit” thrown around a lot. But do you actually know what the difference is between these and why do they matter?
Let me explain!
Turnover
Turnover is just a fancy word for total revenue or sales. It’s the amount of money your business brings in before any costs or expenses are taken out. Turnover doesn’t take into account the costs of producing your products or services – it’s simply the total income received from sales.
Tracking turnover lets you know how much money your business is generating from sales.
Gross Profit
Gross profit is your turnover minus your cost of sales.
Cost of sales is how much it costs you to make the sale. So for most businesses this will be the cost of your stock or
raw materials required to make your products. In a service-based business this will be any costs directly incurred in
order to provide the service. Often referred to as direct costs.
The higher your gross profit margin, the more profit your business retains after covering direct production costs.
Net Profit
Net profit, also known as net income, is the leftover profit after all expenses are deducted from gross profit. This includes overhead expenses like rent, utilities, employee wages, marketing, interest paid on loans, depreciation, and more. Net profit represents true bottom line earnings and is often used to evaluate overall profitability.
The higher your net profit margin, the more efficiently your business is running.
So why do you need to know the difference between these?
It’s good to know what these terms mean as you will see them in your profit and loss report and in your financial
statements. It can help you make business decisions such as where to cut costs or how to make your business more profitable.
If you are a sole trader it is good to know as when completing your self assessment tax return, the tax you owe will be calculated on your net profit figure.
Blog Suggestion: The Accountancy Jargon Cheat Sheet
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