Turnover is Vanity. Profit is Sanity.
Turnover is interesting to know because it is representing gross monies a business generates for a business. It provides information about the total number of transactions that have occurred within a business in a given sales period without taking other business expenses into account. This is the simplest and most widely used form of describing turnover.
In some businesses turnover refers to how well a business is using its assets and liabilities as compared to its sales. If a business has to spend more to move its inventory and parts than what the revenue of sales are, then maintaining those sales orders are no longer viable. Therefore, businesses with efficient back-end operations manage their assets and reduce their liabilities in order to produce a sale at a decent profit margin.
This is why turnover is a relative term. It refers to the effort level a business expels, in order to gain and fulfil its sales, however the business requires sustainability which can only come from a healthy profit margin.
Which brings the discussion neatly over to profit. In this paper we term profit as a net figure – after the initial sale is made, business expenses are deducted, and the product or service has been rendered to the customer/end user.
Profit is the clearest indicator that a business is thriving and operating at its optimum. For example, Cash Flow or Income Statements detail all deductions and expenses against the total sales revenues. Line items deductions include cost of rent, utilities, salaries, equipment/machinery maintenance and depreciation, cost of stock/inventory, administrative costs etc.
The reason why profit referred to as “the bottom line” is in business statements the profit amount is worked out at the very bottom of the sheet. It is the cold hard fact after all business activity has finished for that period.
Profit is the state of play for all businesses. Sometimes it is better to cease some activities, take a step back, and see where the profits are leaving a business with its current sales orders, than to continue to fulfil more orders only to see lower profit margins.
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