What is turnover?
Turnover is the total amount your business earns from the sale of products or services in a given period. It is the first figure at the top of your income statement and says something about the scale of your operations.
You calculate turnover with a simple formula: price × sales volume. That means the selling price multiplied by the number of products or services sold. Turnover therefore gives the total sales revenue excluding VAT before deduction of costs.
Higher sales can come about because you:
- Sells more;
- Higher prices charged;
- Or tap into new markets.
But beware: high turnover does not automatically mean you make a profit. If your costs are rising fast at the same time, you won't be left with much.
Sample calculation
Hypothetical month: you complete assignments worth €5,000 excluding 21% VAT. You invoice €6,050, but only receive €1,210 this month. The turnover remains at €5,000; the amount received is a separate matter.
Turnover and VAT
Turnover is always calculated excluding VAT. You pay the VAT you charge customers to the tax authorities via the VAT return. Say you have a turnover of 5,000 euros with 21 per cent VAT, then you invoice 6,050 euros. The extra 1,050 euros belongs to VAT and is therefore not your turnover.
If you have an annual turnover of a maximum of 20,000 euros, you can, subject to conditions and after registration, make use of the small business scheme (KOR). You then do not charge VAT, do not have to file a tax return, but also cannot reclaim VAT on your expenses.
What is profit?
Profit is the amount that remains from your turnover minus the costs belonging to the same period. It indicates how profitable your business is. You can look at profit in three steps: gross profit, operating result and net profit.
Gross profit
Gross profit is your sales minus direct costs. These are the costs directly related to your sales, such as purchase of goods or material costs. It shows how much margin you have left per product or service sold.
Operating result
Operating profit is calculated by deducting from gross profit your other operating expenses, such as rent, insurance, administration, marketing and depreciation. This figure shows how profitable your business activities are before tax.
Net profit
For a sole proprietorship, income tax is a personal levy. That tax and personal drawings are not business expenses. Profit is not automatically available money: invoices may still be outstanding and payments may follow later. Read the explanation of private withdrawals.
Sample calculation
In the same fictitious month, turnover is €5,000 and the month’s costs are €2,000, both excluding 21% VAT. Profit before income tax is €3,000. This does not change simply because a customer pays later.
Difference between turnover and profit
Turnover is the sales revenue for a period; profit is that turnover minus the corresponding costs. Payment can take place earlier or later. With €5,000 in turnover and €2,000 in costs, the profit is €3,000. For your bank balance, you need to look at receipts and payments.
What is cash flow?
Cash flow is the difference between the money you receive and the money you pay out during a given period. Profit is an accounting measure; cash flow looks at money actually coming in and going out.
You can make a profit and still have negative cash flow, for instance if customers pay late or if you invest a lot. So cash flow determines whether you have enough liquidity to pay your current liabilities.
Positive cash flow
With a positive cash flow, you receive more money in a period than you pay out. That does not automatically mean that you can invest freely: take into account the balance, upcoming obligations and required reserves.
Sample calculation
A separate example: receiving €6,000 minus paying €4,000 results in a €2,000 positive cash flow. If €3,000 in tax is due next month, that €2,000 is not automatically free disposable income.
Negative cash flow
Negative cash flow occurs when more money goes out than comes in. This can be temporary, for example due to large investments, but also a structural sign of financial pressure.
Sample calculation
Back to the fictitious month with €3,000 profit: received €1,210 including VAT, paid €2,420 including VAT. Cash flow: €1,210 − €2,420 = −€1,210. With an opening balance of €4,000, €2,790 remains. There are no other transactions in this example; the VAT payment follows later.
Why are these concepts important?
Are you making a profit but your bank balance is falling? Check outstanding customer invoices, inventory, investments, repayments, tax payments and private withdrawals. These affect cash differently than profit. Make a plan for the next three months: opening balance + expected receipts − payments = closing balance. Include payment dates and also factor in delayed customer payments.
For help with processing and understanding your figures, read what a accountant for self-employed people can take over.
Frequently asked questions
What is the difference between profit and turnover?
Turnover is what your business earns from sales, profit is what is left after expenses. In other words, turnover is what comes in, profit is what you keep.
Which is more important, turnover or profit?
Profit is more important. High sales are nice, but profit shows whether your business is really profitable. Without profit, you cannot invest or grow, even with lots of sales.
What is a good revenue-to-earnings ratio?
There is no general profit margin for every self-employed person. Your earning model and cost structure determine what is appropriate. In addition to profit, look at the balance, reserves and upcoming payments: positive cash flow in one month is not automatically freely disposable money.
