Why we shouldn’t focus too much on turnover

Many business owners focus heavily on their turnover number, the money coming in. We enjoy seeing the numbers going up and rightly so. Growth is always worth celebrating. But turnover isn’t the whole story and it’s really important that we focus on the bigger story when looking at the overall health of our businesses. 

The bigger question is what happens to that money once it comes into the business and how much is left once all overheads have been accounted for. 

We’re constantly encouraged to think about business growth in terms of revenue. Social media is full of businesses celebrating six-figure turnovers and ambitious sales targets which can make it easy to assume that a larger turnover means a more successful business. But increasing turnover can also mean increasing costs. More sales might mean taking on additional employees, buying more stock, new equipment, extra software or even larger premises. Taking on bigger contracts can sometimes mean longer payment terms too, meaning the business has to fund the work before it gets paid.

While the sales figures might look impressive, the reality could be very different. Business owners need to look beyond the money coming in, paying close attention to what needs paying, along with any VAT and tax bills further down the line. 

The numbers to pay attention to

Start by working out what you make from each sale. Calculating the gross profit margin tells you how much is left after the direct costs of providing the product or service have been taken away. If you’re selling something for £100 and it costs £40 to produce, that leaves £60 before your other business costs are considered. Keeping a close eye on this margin over time will show whether increasing sales are genuinely making the business more profitable.

Then there’s the bottom line. The amount left once staff, rent, insurance, software, marketing, professional fees and all the other costs involved in running the business have been accounted for. Net profit gives business owners a clearer idea of whether all that hard work is actually translating into a profitable business.

Cashflow is also important. A business can be profitable on paper and still find itself struggling to pay the bills if customers are late settling their invoices. Business owners must keep a close eye on cash flow, particularly how long customers are taking to pay. Keeping on top of late invoice payments can help prevent a temporary cash-flow issue from becoming a much bigger problem.

It’s also worth knowing the break-even point – what the business needs to achieve each month to survive and when additional sales will start contributing to profit. Looking at these figures together gives a more useful picture than turnover alone and helps business owners understand what is really happening behind the headline turnover figure.

Don’t forget the tax

Tax is another area that can make the numbers look better or worse than they really are.

Money sitting in a business bank account isn’t necessarily profit that can be spent. Some of it may already be needed to cover an upcoming tax bill, for example. Understanding the numbers throughout the year means business owners can plan for tax rather than being hit with an unexpected bill. It also helps them keep an eye on important thresholds, such as VAT registration.

Getting familiar with the numbers

You don’t need to be an accountant to understand what’s happening in your business.

The important thing is to look at the numbers regularly rather than waiting until the end of the financial year to find out how things have gone. Reviewing the finances regularly gives business owners the opportunity to spot any falling margins, rising costs, slow-paying customers or cash-flow problems while there is still time to do something about it.

Turnover matters, but it’s only one piece of the puzzle. A healthy business isn’t necessarily the one with the biggest sales figure. It’s the one that understands its costs, knows its margins, generates sustainable profit and has enough cash flow to keep moving forward.

If you would like help understanding your numbers, get in touch today for a chat.