The difference between turnover and profit

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What is Turnover?

Turnover is the net sales generated by a business. As such, it only refers to the gross sales recognized, minus any sales returns and allowances. It does not incorporate any expenses associated with these sales. It is a good indicator of the general level of economic activity of an organization.

What is Profit?

Profit is the residual earnings of a business after all expenses have been charged against net sales. As such, it shows the efficiency of an organization in being able to develop, market, and deliver goods and services to customers. It is a good indicator of the ability of an organization to survive over the long term.

Comparing Turnover and Profit

There are several key differences between turnover and profit, which are as follows:

  • Income statement positions. Turnover and profit are essentially the beginning and ending points of the income statement - the top-line revenues and the bottom-line results.

  • Focus of attention. Turnover focuses on the ability of an organization to generate sales, while profit focuses on the efficiency of the organization making those sales.

Inventory Turnover vs. Profit

There are some variations on the terms just described. Turnover can also refer to the amount of assets or liabilities that a business cycles through in comparison to the sales level that it generates. For example, a business that has inventory turnover of four must sell all of its on-hand inventory four times per year in order to generate its annual sales volume. This information is useful for determining how well a company is managing its assets and liabilities. If a business can increase its turnover, it can theoretically generate a larger profit, since it can fund operations with less debt, thereby reducing interest costs.

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Turnover vs. Gross Profit

The "profit" term can refer to gross profit, rather than net profit. The calculation of gross profit does not include any selling, general, and administrative expenses, and so is less revealing than net profit. However, when tracked on a trend line, it can give a useful perspective on the ability of a company to maintain its price points and production costs over the long term. There is little relation between turnover and gross profit.