Difference Between Turnover vs Profit
Turnover is the revenue generated by a company as a result of business transactions carried out during the financial year and may comprise one or more revenue streams depending on the operating structure and strategy of the company. Whereas, Profit is the net residual earnings (or net income) of a company after deducting all the expenses against the turnover of the company. They both make the first and last line of an income statement and hence their names. In this article, we discuss the differences between Turnover vs Profit in detail –
Turnover vs Profit – Infographics
Here we provide you with the top 4 difference between Turnover vs Profit
Turnover vs Profit – Key Differences
The key differences between Turnover vs Profit are as follows –
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Though turnover vs profit is constituents of income statement they both have entirely different stories to portray.
- Turnover of a company is more about the total sales (including credit sales) generated by the company. It may include a single stream of revenue or revenue from multiple channels through varied products and services. Companies report their revenue split across different streams of revenues on the basis of products, services, and geographies in their notes for the financial statements so that investors can have a look at the core source of revenue and analyze the contribution towards the turnover. Also, it represents the demand for the product and services of the company’s product in the market. So high turnover may either be related to high demand (or volume) of the products and services sold in the market or the high pricing of products and services charged by the company to its customers.
- Profit of a company provides information about the health of a company. It is calculated after charging all the expenses against the turnover of the company. As a result, it provides you with a lot of information for different nature of expenses like direct expenses (like direct material cost, direct labor cost, etc.), indirect expenses like operating expenses, financial costs or exceptional line items. So, profit tells whether even after charging all sort of expenses to turnover, the company is left with any residual earnings. This brings the point of the pricing of products and services. A company should price its products and services high enough to leave the residual earnings that are in line with the interest of shareholders of the company.
Turnover vs Profit – Head to Head Difference
Let’s now look at the head to head difference between Turnover vs Profit
| Basis | Turnover | Profit | ||
| Definition | It refers to the net sales (or net sum of all the revenue streams) of a company generated through business transactions during the financial year. | It refers to the net residual earning (or net profit) after charging all the expenses against the turnover of a company generated through business transactions during the financial year. | ||
| Context | Though sometimes the term turnover could be used for balance sheet items like inventory turnover or asset turn over but when used in relation to income statement it only refers to the residual earnings of a company. | Though sometimes the term profit could be used in several contexts to state the gross profitability or operating profitability of the company but standalone it refers to the bottom line of the income statement. | ||
| Types | Since it makes the top-line of the income statement, there are no formal variations to it. Though some might say that gross sales could also be used as a proxy for a turnover but it would not be the accurate figure as sometimes discounts to sales make a huge difference to net sales especially in the retail sector. | Since it makes the bottom-line of the income statement, there are also no formal variations to it. Though some might argue that gross profit or operating profit are also types of profit when using the term profit alone it simply refers to the net residual earnings of a company. | ||
| Usage | It mainly tells about the demand for the product and services of a company in the market. | It tells about whether the company is able to sell its product and services at a price high enough to cover all the expenses charged against the turnover of a company. |
Application
Investors analyze the financial statement of a company to gain insights about its performance during a financial year and also to know about the trend with reference to historical performance and peer performance. Turnover vs profit is very important for the company as well as all the shareholders and debt holders of the company. But a high turnover does not mean high profit or vice versa. The expenses charged to the income statement play a major role in inflating or deflating the profits of a company. Sales are considered as most pure line item which is not affected by accounting gimmicks but with practices like channel stuffing (i.e. inflating sales and earnings by pushing products more than their capacity to sell in the market to retailers along its distribution channel) have tainted this holy grail as well.
Final Thought
Turnover and profit make the most important parameters to analyze the performance of a company in comparison to historical and peer performance. Both provide a perspective towards the business strategy of a company to survive amongst the existing competition in the market. Though turnover and profit are not the “be all and end all” of the financial analysis of an any they hold high importance in the process of analysis as both can be inflated or deflated by exploiting the numerous accounting loopholes present in the existing accounting standards. So, one should be aware of the accounting policies followed by the company when analyzing its performance. That being said, it does sound lucrative to have high levels of turnover and profits but they do not guarantee the survival of the company in the long run.
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