What's the Difference Between Turnover and Profit?

01

Introduction

You've had a busy month. Customers have paid you, sales are coming in and your business bank account looks healthier than it did a few weeks ago.

But does that mean your business is making a profit?

Not necessarily.

Turnover, profit and the money in your bank account each tell you something different. Understanding the difference can help you make better decisions about spending, pricing and the future of your business.

02

What is turnover?

Turnover is the total income your business generates from sales or services before deducting expenses.

Imagine you're a freelance designer and you invoice clients £4,000 during a month. Your turnover from those sales is £4,000.

That figure tells you how much business you've generated, but it doesn't tell you how much you've earned after paying your business costs.

It's also worth remembering that invoicing a customer and receiving their payment are different things. How unpaid invoices appear in your records depends on your accounting method.

03

What is profit?

Profit is what remains after you deduct the relevant expenses from your income.

Let's use the same example:

Your turnover is £4,000, but your profit before tax is £2,500.

Your expenses might include software, materials, business insurance, marketing or other costs of running your business. The tax treatment of individual expenses depends on the relevant rules and your circumstances.

The important point is that turnover doesn't tell you how much your business has left after its costs.

04

Why can two businesses with the same turnover have different profits?

Imagine two businesses each generate £6,000 in monthly turnover.

• Business A has £2,000 in expenses, leaving £4,000 before tax.
• Business B has £4,500 in expenses, leaving £1,500 before tax.

They have the same turnover but very different results.

If your expenses are rising faster than your income, you could be working harder without seeing the financial benefit.

Reviewing your figures regularly can help you spot changes and consider whether you need to review your prices, costs or the way you operate.

05

Is profit the same as your bank balance?

No. This is an easy distinction to overlook.

Your bank balance shows how much cash is in your account at a particular moment. Profit measures your business's financial performance over a period.

For example:

• An unpaid invoice: You may have completed work but still be waiting for payment.
• Upcoming bills: Some of the money in your account may already be needed for supplier payments or other costs.
• Tax: You may need to set money aside for your tax liabilities.
• Personal withdrawals: If you're a sole trader, money you take out for yourself isn't generally a business expense, so it doesn't reduce profit in the same way as a business cost.

This is why a healthy bank balance doesn't automatically mean you have lots of money available to spend.

06

A simple monthly numbers check

You don't need to be an accountant to start understanding your figures. Set aside a little time each month to review these five things.

1. Turnover: How much income did your business generate? Is it increasing, decreasing or staying consistent?
2. Expenses: Have your costs changed? Are there any transactions you don't recognise or need to check?
3. Profit: What remains after the relevant expenses? Is your business earning enough to support your goals?
4. Outstanding payments: Are customers late paying invoices? Do you have bills coming up that need to be covered?
5. Cash available: What money is available, what needs to be paid and what should be set aside for tax?

You can record these checks in a spreadsheet or use bookkeeping software. What matters is that your records are up to date and your figures are reliable.

If your numbers don't make sense, check that transactions haven't been missed or duplicated and that your bank accounts have been reconciled.

07

Understand your numbers with confidence

Turnover tells you how much income your business generates. Profit helps you understand what remains after expenses. Your bank balance shows how much cash is available at a particular moment.

You need all three perspectives to get a clearer picture of your business.

At Dainty & Grace Co., I help small business owners keep their records organised and understand what needs attention.

If you're unsure whether your bookkeeping is up to date, a £30 Bookkeeping Check-Up provides a review of your records, with practical notes on what needs attention and your next steps.

For a practical way to review your figures each month, the Monthly Bookkeeping Checklist gives you a simple routine to follow.

Explore bookkeeping support, or get in touch to tell me where things are now.