Difference Between Turnover and Profit

The prospect of every business is to have growth and gain. The analysis of the growth can be done through various parameters, by the analysts. The income statement caters as indicative of that growth.

The income statement can be divided into two main components, that are, turnover and profit.

Turnover vs Profit

The main difference between turnover and profit is that turnover is a product of sales while profit is a product of turnover. Turnover is independent of profit while profit is dependent on the turnover of a business.

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Turnover is also known as topline, revenue, and sales. Turnover is the beginning point of an income statement. The term is also used in investments. A quick turnover rate would generate more commissions for the broker.

On the other hand, profit is also known as Bottomline, net profits, net income, and profits after tax. Profit is the ending point of an income statement.

The calculation of profit is done by calculating other parameters like COGS, SG&A (Selling general and administrative), gross profit, operating profit, and net profit.

Comparison Table Between Turnover and Profit

Parameters of Comparison TurnoverProfit
DefinitionTurnover refers to the gross sales made by a business in a specific year or monthProfit refers to the revenue or benefit generated from the business activities
TypesOperating turnover and non-operating turnoverGross profit, operating profit, and net profit
FormulaTurnover can be calculated by multiplying unit selling price by the number of units sold Profit can be calculated by subtracting turnover by costs
Inter-DependencyTurnover is not dependent on profit Profit is dependent on turnover
Other namesTopline, revenue and sales Bottomline, net profits, net income, profits after tax

What is Turnover?

Turnover is a concept derived from accounting. Turnover refers to the operations that are conducted by a business.

It provides insight into the process of collection of cash by the company from accounts receivable and how quickly the inventory of a company is sold. The overall turnover can provide the total revenue of a company.

In investment, turnover is referred to the percentage of a portfolio that gets sold in a particular year or month. A quick turnover rate would generate more commissions for the broker, for the trades placed.

The total revenue of the company is calculated by turnover, especially in Asia and Europe.

The two main assets of any business are its inventory and the accounts receivable. Both the acids require an investment of large cash and it is important to evaluate how fast the business would collect the cash.

Turnover ratio is used for such evaluation. The ratio calculates the collected cash from the inventory and accounts receivable investments The formula for obtaining the turnover ratio in accounts receivable is usually the credit sales which is divided by the average accounts which are receivable.

The formula for calculating the inventory turnover is the total cost of all the goods sold which is divided by the average inventory of that particular business.

The ratio obtained by turnover is extensively used by investors and fundamental analysis to measure the growth of the business. It also helps them to understand if the company would be a good investment.

What is Profit?

Profit is referred to as the Revenue or benefit generated from the business activities. The profit earned is By deducting costs, expenses, and even taxes which are sustained during the activities.

The profit can be either kept aside or can be reinvested back into the business. The profit is calculated on the total revenue from the business transactions.

Profit is always less than the total expenses in the business transactions. It is accounted for after all the expenses. The main aim of every business is to gain profitability in various forms.

Analysts determine profitability in various ways like top-line profitability or profitability before taxes and other expenses. Profit can be further divided into three major types – operating profit, gross profit, and net profit.

All three types of profit are found on the income statement.

The various types of profit are useful for giving insights about the performance of the company to the analysis, in comparison to similar businesses. Gross profit is calculated by deducting COGS (Cost of Goods Sold) from total sales.

Operating profit is calculated by subtracting the operating expenses from the total gross profit. Net profit is calculated by subtracting the taxes and interests from the calculated operating profit.

All the three types of profits are interrelated to each other. Profit plays an essential role in analyzing the financial statement of a business, which forms the basis of various decision-making processes.

The core aim of every business is to run its operations and earn a profit, which is higher than total expenses, taxes, and interests.

Main Differences Between Turnover and Profit

  1. Turnover refers to the net sales of a business while profit refers to the residual earning after deducting all the expenses of a business.
  2. Turnover is the beginning point of an income statement while profit is the ending point of an income statement.
  3. Turnover is calculated before taking out major costs while profit is calculated as the residual after all costs.
  4. Turnover can be classified into two main types – operating and non-operating while profit can be classified into three main types – operating profit, gross profit, and net profit.
  5. Turnover is a product of sales while profit is a product of turnover.
Difference Between Turnover and Profit

Conclusion

Both turnover and profit measure the earnings of a business. Both the processes are useful in the preparation of income statements.

Both the components are different from each other and are also related to each other. The calculation for evaluating both the components is distinctly different.

Both play a significant role to determine the growth and gain of a business. Both the components can be further classified into other types.

Knowledge about both components is essential in determining the income statement and evaluating the financial analysis and performance of the business.

References

  1. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1911-3846.2011.01093.x
  2. https://link.springer.com/article/10.1023/A:1012430513430
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