Difference Between Turnover vs Profit
Where do investors look in the annual reports of companies to park their money? What is the key metric that they look for? If I specifically talk about the P&L statement, what are some of the parameters that an investor looks for? Turnover vs profit surely bag significantly important positions in this case. Both these parameters are looked at in a P&L statement for varied reasons. The Turnover is indicative of the growth prospects of a business whereas profits, in addition to the growth prospects, also give an impression of how the management controls different costs.
Turnover, Topline, Revenues and Sales is defined as the gross earnings that a company makes in a period (for the simplicity purpose, I will take an annual period). Turnover stated in the income statement can be classified as either:
Operating Turnover constitute part of the main operations of a company. If I talk about the operating Turnover of an automobile company then the operating Turnover will primarily be the proceeds from the sale of vehicles.
Or another example of a movie business where the core business will be Turnover from the box office, food, and beverages
Taking the above example of an automobile company, earnings from current investments in mutual funds or liquid funds or appreciation in assets’ value or fixed deposits etc. constitute non-operating income.
Turnover is defined mathematically by the selling price of product times the number of products sold. By analyzing the annual trends of Turnover in the annual reports YoY basis, the growth prospects of a business can be guessed. The expansion plans of a company ignite hopes of inflated Turnover. Turnover form the basis of the income statement. All the calculations are based on this single number.
For instance, if an automobile seller sells a single model for a car that has a selling price of INR 300,000 and a total of 100 cars were sold in that period (one year), then the Turnover of the company will be
- Turnover of the company = Selling cost of product * number of products sold
- Turnover of the company = 300,000*100
- Turnover of the Company = INR 30,000,000
There are some important ratios that are related to Turnover of a company. For instance receivables turnover ratio. Also when valuing a business, a lot of parameters are forecasted on the basis of Turnover. For instance, other income is taken as a % of operating income.
Profits are the net proceeds from the sale of products after accommodating all the expenses. The expenses that stand between Turnover vs profits are:
- Cost of goods sold – The cost incurred in order to manufacture and sell the product
- Employee benefit expenses – Employee welfare costs
- Depreciation and Amortization costs – Noncash costs related to the wear and tear of the product
- Finance costs – Cost incurred because of financing via external sources
- Taxes – Income tax payable to a government
Profits are dependent on Turnover. Now the above-mentioned costs are subtracted from the total Turnover from operations to get to profits. If the difference is positive then the company is said to have made profits else the company is said to have booked losses. Profits are a very crucial metric for investors because of a very important ratio that woos investors. The ratio is ROE i.e. Returns on equity that is defined by the ratio of net profits and total shareholders’ equity.
If let’s say, in the above automobiles example,
- Cost of goods sold (COGS) = 5,000,000
- Employee benefit expenses = 6,000,000
- Employee benefit expenses = 5,000,000
- Finance costs = 3,000,000
- Taxes = 4,000,000
- Total expenses = Cost of goods sold (COGS)+Employee benefit expenses+Employee benefit expenses+Finance costs+Taxes
- Total expenses = 5,000,000+6,000,000+5,000,000+3,000,000+4,000,000
- Total expenses = INR 23,000,000
Above we get Turnover of the Company
Hence, Now we have to find the total profits generated by the business are:
- Total Profit = Turnover – Costs
- Total Profit = INR 30,000,000 – INR23,000,000
- Total Profit = INR 7,000,000
In this way, profits are calculated for a business. And the Total Profit as we get by the calculation is INR 7,000,000
Head To Head Comparison Between Turnover vs Profit (Infographics)
Below is the top 7 difference between Turnover vs Profit
Key Differences Between Turnover vs Profit
let us discuss some of the major Difference Between Turnover vs Profit
- Turnover is the amount that a business earns from the sale of its core products and also the non-operating income from other sources whereas profits are the by-products that come into play after all the costs have been taken care of.
- Turnover is independent of profits but profits are dependent on Turnover. Hence more the Turnover, more is the profit subject to a great control over variable costs.
- Profits can be of either gross or net type. Gross profit is attained after subtracting COGS from Turnover. On the other hand, when we talk about net profits, it is the subtraction of all the costs involved from Turnover.
- Both Turnover vs Profit can be found on the income statement. Turnover is located at the top whereas profits are found at the bottom of the income statement.
- The difference lies also in the way these parameters are calculated mathematically.
Turnover vs Profit Comparison Table
Below is the 7 topmost comparison between Turnover vs Profit
|The Basis Of Comparison Between Turnover vs Profit||
|What is it?||The gross proceeds from sales made by a company in a particular period (usually a month, quarter or year)||The net proceeds that are left in the end after accommodating costs such as COGS, SG&A (Selling, general and administrative) expenses, Depreciation, Taxes etc.|
|What are the other names?||Revenue, sales, Topline||Net income, net profits, profit after tax, bottom line|
|Formula||(Unit selling price) X (Number of units sold)||Turnover – Costs|
|Position||Turnover is the superior one||Profit is a product of Turnover|
|Dependency||Turnover is independent of profits||Profits depend on Turnover because without Turnover there cannot be profits|
|Types||Turnover can fall under-
||Profits are mainly classified as –
|Where do these exist?||Topmost position in the Income statement||Bottommost position in the Income statement|
Now we are clear about these two terms as to how these are different from each other and how one of these depends on the other. Although profits are very important for a company because it decides if the company can stay for a long time in the business. But it is the Turnover from where profits are born and hence the magnitude of profits will be determined by the magnitude of Turnover and by the costs that lurk in between these two parameters. The higher the costs the higher share of Turnover will be cut and hence lower will be the net profits.
This has been a guide to the top difference between Turnover vs Profit. Here we also discuss the Turnover vs Profit key differences with infographics, and comparison table. You may also have a look at the following articles to learn more –