Turnover

What does turnover mean? 

A company’s turnover is the total of all income from its activities, sales of goods and services. Turnover is always given over a defined period such as a day, week, month or year, which gives the daily, weekly, monthly and annual turnover.

Example: a furniture shop’s only source of income is the sale of chairs. Its turnover = selling price per chair x the number sold, without deduction of any costs but also excluding VAT.

Turnover = excluding VAT

Value added tax – VAT – is a turnover tax. It is calculated by applying a percentage rate to turnover. The VAT rate on building materials is 21%. So anyone building a house and buying tiles for € 10.000,- will pay € 2.100,- VAT, together € 12.100,-. The tile shop’s turnover is € 10.000,-, the VAT payable to the government is € 2.100,-. Why is that € 2.100,- not included in turnover?

• Firstly, because only the € 10.000,- becomes the property of the tile dealer; for VAT the dealer is merely an intermediate station. The entrepreneur is temporarily the tax 'collection office'.
• Secondly, and just as important, including VAT distorts the picture of sales for the entrepreneur. VAT rates sometimes change; think of the reduced rate of 6% for renovation work, where the 21% does not apply. Moreover, the composition of (for example) a company’s sales varies. The share of 6% goods compared with 12% and 21% goods would then change the turnover including VAT, which distorts the evolution of the underlying product sales.

The importance of the turnover figure

To do good business, the entrepreneur must achieve three parameters: sufficient turnover, an appropriate sales margin and good cost control. Low costs and a high profit margin but with low sales gives poor results. If the tile dealer only makes three sales of € 10.000,- per year, the profit of 3 times € 3.800,- is of little use to him. That € 11.400,- gross profit (3 X € 3.800,-) will never cover the costs of the shop, administration, financing, electricity etc.

A company’s turnover is therefore not a benchmark in itself. Mass products generate high turnovers – think of the sale of fuel or tobacco products – but often with low to very low sales margins. The large amounts then by no means guarantee a healthy level of profit. Turnover must therefore also be compared within a sector: what sales do other fuel dealers, clothing shops or supermarkets achieve ... ?

Turnover, cost price and break-even point

The better entrepreneur knows their cost prices. Anyone who regularly advises companies is amazed at the lack of insight into the cost price of a product. Yet, together with market demand, that is the most important factor determining the selling price. A slaughterhouse that also cuts the meat has to make do with a profit margin of only cents per kilogram. The slightest variation in cutting efficiency (systematically cutting away a little too much meat with the fat) tips the balance into a loss.

That is why knowing a business’s break-even point is important. That is the turnover level at which the gross profit achieved equals the costs (the sum of the fixed costs and the variable costs at that sales level). All extra sales above that point give net profit. Anyone who stays below that point makes a loss.