At first glance, the premise of turnover vs revenue seems simple. The words are commonly used as synonyms to describe the total sales or income of a business over a given period.
In many situations, turnover and revenue describe such similar ideas that they can be used interchangeably without problems. Nevertheless, there are differences, and some of these are vital for SMEs in the UK to know. Buckle up, let’s get into this…
Does turnover mean revenue?
Not always. To explain why, let’s take a common-sense view of the three broad meanings of business turnover: staff, inventory, and sales.
The turnover rate of staff is a crucial metric for a business owner to track but it has no direct relationship to revenue. Inventory turnover (i.e. the rate at which stock gets replenished) is another metric that retailers or manufacturers monitor. This figure is independent of revenue, albeit the faster a business turns-over its inventory, the quicker it will typically harvest cash.
Sales turnover is the type that maps most closely to revenue and is the focus of this article.
There are clear parallels between these two ideas even though they are not the same thing.
What do you mean by the turnover of a company?
In the UK, turnover is defined by The Companies Act 2006 as: "the amounts derived from the provision of goods and services falling within the company's ordinary activities after deduction of trade discounts, VAT, or other taxes". This is the first figure shown on the income statement of a business.
But even this is not straightforward. For starters, sales turnover should include items that a business might not think of as revenue, such as when a client reimburses travel expenses.
There are also various circumstances when a proportion of the revenue in a transaction is not turnover. HRMC advises that if a business is: "acting as an 'agent', 'broker' or 'trader', what constitutes turnover will depend heavily on the precise nature of the contract." One example is the travel industry, where operators often sell hotel stays or flights on behalf of another business. The specifics of each situation determine whether it is the gross or the net value of these goods or services that should be the correct turnover figure.
What is the difference between revenue and turnover?
Now it’s time to look at revenue. Economic theory describes revenue as the number of units a business sells (or its number of customers) multiplied by the price of its goods or services.
Even so, the UK’s Generally Accepted Accounting Principles (GAAP) take a broader view. The new UK GAAP define revenue in FRS 102 as: "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity." This excludes new share capital.
Yes, this is similar to turnover but there are nuances. A business might have revenues that don’t originate from providing its goods or services. For instance, a business in the financial services sector often derives income from investment capital which, in HMRC's view, is not turnover. This is why these types of business do not always describe revenue as turnover.
There can also be income which is neither revenue nor turnover. For instance, the profit on the one-off sale of a property or old machinery, if these transactions are not one of the ordinary business activities of the firm.
To some degree, this is academic as these funds are still included on income statements. Depending on the circumstances, they might fall into the category of 'other income' or even 'extraordinary income' but not turnover.
Why is turnover a significant number for SMEs to know?
Probably the clearest example is VAT. A business in the UK only has to register for VAT once its annual turnover reaches £85k or if it expects to breach this threshold soon. Whether or not the business is at this level, there are situations where it’s expected to record the value of transactions in its turnover figure that aren’t obvious streams of revenue. These include:
- Goods loaned to customers
- Business goods used for personal reasons
- Goods bartered, part-exchanged, or given as gifts
HMRC provides more detail here but if you feel like your mind is about to overheat, don't panic. Check out some more Business 101s and arm yourself with a better understanding of business and finance terminology.Sign up in minutes
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