Difference Between Turnover and 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.

Key Differences

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

  • A company’s turnover is more about the total sales (including credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more) generated by the company. It may include a single revenue stream or revenue from multiple channels through varied products and services. Companies report their revenue split across different streams of revenue based on products, services, and geographies in their notes for the financial statements so that investors can 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.The profit of a company provides information about the health of a company. It is calculated after charging all the expenses against the company’s turnover. As a result, it provides you with a lot of information for different natures of expenses like direct expenses (like direct material cost, direct labor cost, etc.), indirect expenses like opexOpexOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more, financial costs, or exceptional line items.So, profit tells whether the company is left with any residual earnings even after charging all sorts of expenses to turnover. It 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 the shareholders of the company.

Turnover vs. Profit Comparative Table

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.

This article has been a guide to Turnover vs. Profit. Here we discuss the top difference between turnover and profit, infographics, and a comparative table. You may also have a look at the following articles –

  • Revenue vs. TurnoverProfit vs. IncomeAnnual Turnover OverviewStock Turnover Ratio Definition