9

Turnover, Gross Profit, Net Profit, EBITDA


A while back I was watching an episode of Dragons Den that reminded me of the confusion that abounds around the words: turnover, gross profit, net profit, profit margin and a bunch of other terms that have everything to do with how you view the profitability of a business.

Turnover or T/O

This is your total sales figure. Literally, in money terms, how much you sold during a particular period (usually your financial year). Turonver To Date means the turnover so far this year. From this you can start to make a prediction of your total turnover for the year. If you have professional indemnity insurance you will need to know this. Most policies allow a degree of error of 50% (to make up for the uncertainty factor), but check your insurance small print. Never confuse turnover with profit. One last thing, always quote turnover excluding sales tax or VAT. If you quote turnover including tax, any potential investors will run a mile (they will see you as someone who likes to inflate figures).

Gross Profit

If all you sell is a service. And there are no costs directly involved in supplying that service, then your gross profit is the same as your turnover. However, if you resell other peoples’ goods or services, manufacture things for resale or do have costs directly involved with what you do, then you need to remove those costs from your sales in order to arrive at your gross profit. Typically these costs will be held an account called Cost of Goods Sold (aka Cogs). If you sell mainly services, this is often shortened to simply Cost of Sales (COS). Here’s a simple example: You buy a widget at a cost of 100 and you resell it for 200. If you sell just one of these, your turnover will be 200. However, your gross profit will be 100 (because you must subtract the cost of the goods sold).

Gross Margin

Using the previous example, the gross margin is 50%. Gross Margin = Selling Price less Cost Price divided by Selling Price multiplied by 100.

Markup

Again, using the previous example, we marked up the product from 100 to 200, which equals a 100% markup.

Net Profit

There are multiple versions of this! The bottom line is your turnover less all costs. Your costs are not only Cogs and overheads but also depreciation of your assets, any amortization of loans and of course your tax liability on the profit made. Accountants use different abbreviations to show exactly what degree of profit they are reporting. The most common is EDITDA.

EBITDA

Earnings Before Interest, Taxation, Depreciation and Amortization. In other words your turnover less Cogs, overheads and other expenses. You can quote on any subset of this. For example: EBIT = Earnings Before Interest and Taxation (so here we are including depreciation and amortization).

Learn the above and you will impress any investor (and bank manager).

NOTICE: If you haven’t joined our 12 week online accounting course, please select the option below:

Join Over 12,000 Others Who've Taken And Passed The Accounting for Everyone Online Certified Bookkeeping Course

Instant access to the whole course plus online certification plus 150 page downloadable workbook with answers Just £29.99 Click Here To Join
Please Share - Thank You
    Quentin Pain
     

    Quentin Pain helps people thinking of starting a business and those already in business achieve success. Visit QuentinPain.com Today.

    Click Here to Leave a Comment Below 9 comments
    Quentin Pain - July 25, 2015

    I’ve only just realised that the comments on this page were turned off – hence the huge gap in dates! But they’re on again now, so if you have any questions or comments, please go ahead and post them here. Thank you.

    Reply
    Jean-Claude - November 13, 2012

    C’etait fantastique. Merci beaucoup!

    Reply
    Brian - October 12, 2011

    Nicely put and something my managing director should learn to understand!

    Reply
      Quentin Pain - October 12, 2011

      Thanks Brian. It’s a question I get a lot!

      Reply
    Kevin Green - September 1, 2011

    I’ve just subscribed to your free course. Your explanation of terms on this post is nice and simple, removing some of the mysteries – thanks. I work in the charity/education sector, so I’m more interested in accounting for the provision of teaching services than widgets! Would you be able to write a charity rather than a business version of T/O, GP etc?

    Thanks, Kevin

    Reply
      Quentin Pain - September 1, 2011

      Thanks for the comment Kevin. There is only one word you really need to know and that is ‘Revenue’. For sales accounts you can use ‘Contributions’ or ‘Donations’ or ‘Project x’. Expenses remain as they are. You are basically reporting on the revenue and expenses of the charity/not-for-profit. So in a nutshell the word “Revenue’ replaces all things ‘sales’ and ‘P&L’ etc. It is of course all semantics, and the important thing is that you report everything with terms that make it plain what you are doing. You can happily use the word ‘sales’ for income accounts if it makes sense to what you do (many charities sell stuff as well as take in donations).

      Reply
    Frank Cook - January 7, 2011

    I too have noted the confusion on Dragons Den.

    I think it is helpful and traditional to distinguish between margin and markup as follows –

    Sales £100
    Purchases £60
    Gross profit £40
    Margin% 40/100 i.e. 40%
    Markup% 40/60 i.e. 67%

    Frank

    Reply

    Leave a Reply: