Turnover vs Profit

Article byMelvin Sewak
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Turnover and Profit

Profit is the company’s earnings resulting after charging all the expenses against the net sales. In contrast, turnover is the net sales made by a company resulting from the transactions done during the accounting year, which may include one or more revenue generation sources that depend on the company’s strategy and operating structure.

Turnover-vs-Profit

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Turnover is the revenue generated by a company as a result of business transactions carried out during the financial year. It may comprise one or more revenue streamsRevenue StreamsRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more 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. They both make the first and last line of an income statement, hence their names.

Turnover vs. Profit Infographics

Let’s see the top differences between Turnover vs. Profit along with infographics.

Turnover-vs-Profit-info

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Key Differences

Though both are constituents of the income statement, they have entirely different stories to portray.

Turnover vs. Profit Comparative Table

BasisTurnoverProfit
DefinitionIt refers to the net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more (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 transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more during the financial year.
ContextThough sometimes the term turnover could be used for balance sheet itemsBalance Sheet ItemsAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more like inventory turnover or asset turn over. Still, when used in relation to the 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 lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. read more of the income statement.
TypesSince 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, 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.
UsageIt 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 a company’s financial statement to gain insights into its performance during a financial year and also to know about the historical and peer performance trends. Of course, turnover and profit both are 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 a company’s profits. Sales are considered the purest line item not affected by accounting gimmicks, but with practices like channel stuffingChannel StuffingChannel stuffing is a deceptive and illegal practice through which it could sell a company or business forces more products than into its distribution channel. As a result, it inflates the sales for that product. Such tactics, although considered malpractice, are used to achieve short-term sales objectives that can be detrimental to the business in the longer run.read more (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. In addition, both provide a perspective on the business strategy of a company to survive amongst the existing competition in the market.

Though they are not the “be-all and end-all” of any financial analysis, they hold high importance in the analysis process 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 policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more followed by the company when analyzing its performance. That being said, it does sound lucrative to have high turnover and profits. However, they do not guarantee the company’s survival in the long run.

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