Annual turnover: What it is and how to calculate with examples
Annual Turnover and The Role It Plays In Your Business
Annual turnover is a performance metric that plays a vital role in understanding how well your business is operating — and where there's room for improvement. The concept is often confused with profit, and both figures offer insights into the financial health of your business.
This guide discusses what annual turnover means in business, why it's important and how it's different from profit. It provides a simple formula for calculating yearly turnover and also looks at the different types of turnover: inventory, accounts receivable and employee.
What is annual turnover?
Annual turnover is the total income your business makes over one financial year. It's also known as gross revenue or total sales. It combines all the money you've received from selling products or services over a year.
Why is annual business turnover important?
Annual business turnover is important because it shows how much money you make from selling your goods or services over a year. It’s also a number you’ll need to know when filing tax returns or registering for GST.
This number can help you determine the following:
Your net and gross profit
How your business is performing in specific areas or compared to previous years
How close you are to hitting your annual sales targets
How well your sales and marketing strategies have performed
Where you can reduce business operation costs to boost profitability
The resale value of your business (if you’re planning on selling)
How to calculate your annual business turnover
To calculate your annual business turnover, add your total sales from all 12 months in the last financial year.
If you’re a product-based business, this means the total money you received from the products you sold. Likewise, for a service-based company, your turnover is the total amount you charged for these services.
If your accounting records are current, calculating annual turnover should be straightforward. For example, you’re a candlemaker who's sold 5,000 candles over the last financial year at $45 each.
A simple calculation of your annual turnover would be:
5,000 candles x $45 = $225,000
You can also calculate business turnover for other set periods — for example, quarterly.
Example of annual turnover
Here's an example of how to use annual turnover to work out other business financial metrics:
Say you’re a footwear company with an annual turnover of $2.5 million. Your cost of goods sold is $300,000, and your operating expenses are $160,000.
Use this formula to calculate gross profit:
Gross profit = annual turnover – COGS
For this example, this translates into:
$2,500,000 – $300,000 = $2,200,000
Now that you have gross profit, you can calculate your net profit using the following formula:
Net profit = gross profit – operating expenses
For this example, this translates into:
$2,200,000 – 160,000 = $2,040,000
You can now compare all three numbers — annual turnover, gross profit and net profit — to last year’s figures.
The difference between turnover and profit
The main difference between annual turnover and profit is the method used for calculating each metric:
Annual turnover is your company's total income from sales over the year. For example, if your business makes $150,000 in sales in one financial year, your annual turnover is $150,000.
Profit is total income minus expenses, such as cost of goods sold and operating expenses. Your business makes $150,000 in sales, and the cost of materials, labour, and other expenses is $50,000. In that case, your business profit is $150,000 - $50,000 = $100,000.
Comparing turnover and profit
When you look at turnover and profit side-by-side, you can gauge how your expenses impact your profit or bottom line — and, therefore, your ability to grow and scale.
Suppose your turnover is high, but your profit is low. In that case, you may need to find ways to reduce your operating expenses to achieve a better turnover/profit balance.
What are the other types of annual turnover?
Other types of annual turnover can help you understand how your business is operating every year.
Annual inventory turnover refers to how often you sell and replace inventory over one year.
A low turnover could indicate your business is overstocked or has excess inventory. It could also mean you’re not generating enough sales and may need to rethink your marketing strategy. On the other hand, while a high turnover is a good sign that sales are strong, you also want to ensure you have enough inventory to service the demand.
Here’s how to calculate annual inventory turnover:
Divide the cost of goods sold (COGS) by average inventory value.
Accounts receivable turnover
Accounts receivable turnover allows you to calculate the accounts receivable turnover ratio — also known as the debtors turnover ratio — which measures the average time to collect outstanding debt from your customers over a given period of time, often the financial year. You can use it alongside other metrics to determine how well your business manages its cash flow.
The accounts receivable turnover formula is:
Accounts receivable turnover = Net credit sales ÷ average accounts receivable
Net credit sales are the total (gross) credit sales adjusted for sales returns (goods returned for a refund) and allowances (seller price reductions on a credit sale prior to payment e.g. a reduction on a faulty item purchased on credit).
Net credit sales = total credit sales - sales returns - sales allowances
Average accounts receivable are the sum of accounts receivable at the start plus the end of the period, divided by two.
Average accounts receivable = (receivables at start of period + receivables at end of period) ÷ 2
To figure out the “average number of days to collect” on accounts receivable, divide 365 days by your accounts receivable turnover ratio.
365 ÷ Accounts receivable turnover = days to collect receivables
A credit sale is when a customer owes you for the sale of a product or service, and you’ve agreed they’ll pay later.
Accounts receivable are the invoiced funds that customers owe your business.
Annual employee turnover refers to the number of employees who leave your business in a year. This type of turnover is also known as churn rate or labour turnover.
Use this formula to calculate annual employee turnover:
Employee turnover % = (Number of staff who left \ Average number of staff) x 100
To calculate the “average number of staff”, add the number of staff you had at the beginning of the year, to the number of staff you have at the end of the year. Then divide the answer by two.
Annual turnover FAQs
How to categorise your annual business turnover
Alongside your staff numbers, you can use annual turnover to quantify the size of your business. Understanding the size of your business can help you plan for your projected growth. Remember that a high annual turnover doesn’t always mean lots of staff.
Here’s how micro, small and medium-sized businesses are commonly categorised in New Zealand:
Micro business: 1-5 employees and an annual turnover of less than $2 million
Small to medium-sized businesses: 6-49 employees and an annual turnover of $1 - $30 million.
How to calculate your average turnover
To calculate your average turnover, follow these steps:
Add your annual turnover from every year you’ve been in business.
Then, divide the answer by the number of years you’ve been in business.
How to calculate annual turnover from a balance sheet
To calculate annual turnover from a balance sheet, add your total sales from every month of the financial year. This formula will give you an annual turnover figure.
You can then use this figure to calculate:
Gross profit: annual turnover minus the cost of your sales.
Net profit: gross profit minus all your other expenses.
Real-time, accurate financial reporting with MYOB
MYOB is a scalable, cloud-based business management platform that allows you to track and report on your income and annual turnover with ease. With MYOB, you have the tools and insights you need to take your business to the next level.