What is Annual Turnover?
Annual turnover is the total amount of money your business earns from selling products or services within a financial year. This figure includes all income generated from your core business activities, making it a clear indicator of your business's sales performance.
Why is Annual Turnover Important?
Knowing your annual turnover is essential for several reasons:
- Net and Gross Profit Analysis: It helps you determine both your gross and net profits.
- Performance Monitoring: You can compare your current performance to previous years or specific areas of your business.
- Sales Targets: It shows how close you are to meeting your annual sales goals.
- Strategy Evaluation: It allows you to assess the effectiveness of your sales and marketing strategies.
- Cost Management: By understanding your turnover, you can identify areas where you can reduce costs and improve profitability.
- Business Valuation: If you plan to sell your business, your annual turnover will play a significant role in determining its resale value.
How to Calculate Annual Turnover
Calculating your annual turnover is straightforward. Simply add up the total sales from all 12 months of the last financial year.
For instance, if you run a candle-making business and sold 5,000 candles at $45 each over the year, your annual turnover would be:
5,000 candles x $45 = $225,000
This method applies whether you sell products or offer services.
Example: Calculating Gross and Net Profit
Let's consider an example to see how annual turnover can be used to calculate other financial metrics.
Imagine you run a footwear company with an annual turnover of $2.5 million. Your cost of goods sold (COGS) is $300,000, and your operating expenses are $160,000.
- Gross Profit: To calculate gross profit, subtract the COGS from your annual turnover.
\[
Gross\ Profit = Annual\ Turnover - COGS = \$2,500,000 - \$300,000 = \$2,200,000
\]
- Net Profit: Next, subtract your operating expenses from your gross profit.
\[
Net\ Profit = Gross\ Profit - Operating\ Expenses = \$2,200,000 - \$160,000 = \$2,040,000
\]
You can compare these figures with previous years to assess your business's growth and profitability.
Turnover vs. Profit: Understanding the Difference
While turnover and profit are closely related, they represent different aspects of your business's financial health.
- Annual Turnover: This is your total income from sales over the year. For example, if your business makes $150,000 in sales, your annual turnover is $150,000.
- Profit: Profit is your total income minus expenses, including the cost of goods sold and operating expenses. If your business makes $150,000 in sales and your expenses total $50,000, your profit is $100,000.
By comparing turnover and profit, you can gauge how your expenses impact your profitability. If your turnover is high but your profit is low, you may need to reduce your operating expenses to improve your bottom line.
Other Types of Annual Turnover
Annual turnover isn't limited to sales revenue. Here are other types of turnover that can provide insights into your business's performance:
- Inventory Turnover: This measures how often you sell and replace your inventory over a year. A low turnover might indicate overstocking or insufficient sales, while a high turnover suggests strong sales but also the need to maintain adequate inventory levels.
\[
Inventory\ Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory\ Value}
\]
- Accounts Receivable Turnover: This ratio measures how quickly you collect outstanding debts from customers. It’s an essential metric for managing cash flow.
\[
Accounts\ Receivable\ Turnover = \frac{Net\ Credit\ Sales}{Average\ Accounts\ Receivable}
\]
- Employee Turnover: Also known as the churn rate, this measures how many employees leave your business in a year.
\[
Employee\ Turnover\ \% = \frac{Number\ of\ Staff\ Who\ Left}{Average\ Number\ of\ Staff} \times 100
\]
FAQs: Annual Turnover
How is Annual Turnover Categorized?
Businesses in Australia are often categorized based on their annual turnover:
- Micro Business: 0-4 employees and $1-$2 million in turnover.
- Small Business: 5-19 employees and $2-$10 million in turnover.
- Medium Business: 20-199 employees and $10-$250 million in turnover.
How Do You Calculate Average Turnover?
To find your average turnover, add your annual turnover for each year you’ve been in business and divide by the number of years.
Can You Calculate Annual Turnover from a Balance Sheet?
Yes, by adding up the total sales for each month of the financial year, you can calculate your annual turnover.
Real-Time Financial Reporting with MYOB
MYOB is a cloud-based business management platform that simplifies tracking and reporting your annual turnover. With MYOB, you have the tools and insights you need to take your business to the next level.
Start managing your business finances more efficiently with MYOB today!