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).
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).
Using the previous example, the gross margin is 50%. Gross Margin = Selling Price less Cost Price divided by Selling Price multiplied by 100.
Again, using the previous example, we marked up the product from 100 to 200, which equals a 100% markup.
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.
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).
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