Money comes into your business. Money goes out. But how much have you actually made?
That’s where understanding the difference between turnover and profit matters.
As a sole trader, you’ll hear turnover and profit mentioned regularly. They mean different things, and understanding both helps you see how your business is really performing.
What is turnover?
Your turnover is the total income your business earns from selling goods or services, before business expenses are taken off.
For example:
You invoice your customers £48,000 during the year.
Your turnover is £48,000.
That’s before you’ve deducted costs such as tools, materials, insurance or software.
What is profit?
Your profit is what’s left after allowable business expenses are deducted from your business income.
For example:
Turnover: £48,000
Allowable business expenses: £14,000
Profit: £34,000
Broadly speaking, profit rather than turnover is the starting point for working out your sole trader Income Tax.
What about gross profit and net profit?
You may also hear gross profit and net profit.
Gross profit is usually your sales minus the direct costs of providing what you sell. Net profit takes your other business expenses into account too.
You don’t need to become an accountant to run your business. The important bit is knowing that sales coming in aren’t the same as profit you’ve made.
Why does turnover matter?
Turnover still matters.
It can affect whether you need to register for VAT and whether Making Tax Digital for Income Tax applies to you.
It also helps you see how your business is growing.
So both figures matter, for different reasons.
Your bank balance isn’t your profit
Your bank balance, turnover and profit are three different things.
Money in your account may include amounts you’ll need for tax or upcoming bills. Taking money out for yourself doesn’t normally turn that withdrawal into a business expense either.
That’s why your bank balance alone doesn’t tell you how profitable your business is.
Why knowing your profit helps
You don’t want to discover how your business performed only when it’s time to complete your Self Assessment.
Keeping your accounts up to date gives you a clearer idea of what you’re earning, what you’re spending and what you’re actually making.
It can also help you spot something important: if turnover is climbing but profit isn’t following it, it’s worth finding out why.
Do I pay tax on everything I earn?
Not usually.
Allowable business expenses can reduce the profit on which Income Tax is calculated.
But an expense doesn’t become allowable simply because you paid for it from your business account.
Not sure what counts? Read our guide: What Expenses Can a Sole Trader Claim?
Turnover growing?
Higher turnover can bring new responsibilities.
You may approach the VAT registration threshold. Your tax bill may increase. Making Tax Digital may also become relevant.
They’re much easier to deal with when you can see them coming.
Know what your business is really making
You don’t need to spend your evenings studying spreadsheets.
Brease keeps your bookkeeping and accounting organised throughout the year, giving you a clearer picture of what’s coming in, what’s going out and what your business is actually making.
Turnover tells you how much business you’re doing. Profit tells you how much of it is working for you.
Want a clearer view of your numbers?
See your fixed monthly Brease fee with our instant quote, or Ask Brease if you’re not sure what you need.
Looking for more simple business advice?
This guide is part of the Brease Guides collection, created to help sole traders understand bookkeeping, tax and Making Tax Digital without the jargon.
