Your sales are growing.
Revenue looks great on paper.
But when you check the bank account, there is no money left.
If that sounds familiar to you as an SME founder, you are not alone. We see many founders who don’t understand how to stop confusing turnover with profit.
While the difference may seem technical, it can be the difference between a business that thrives and one that fails. It is worth understanding the difference between the two.
Here in this blog, we will explain the difference between turnover and profit in plain English. We’ll show you why the two numbers tell very different stories, and how to make sure you are measuring what really matters.
First, some definitions:
What is Turnover?
Turnover is the total income your business generates from sales over a given period. It is the top-line number on your profit and loss statement.
Think of it like the size of the cake you baked. A big cake looks impressive, but until you know how much of it you actually get to keep, you do not know how satisfying it really is.
Turnover tells you how busy your business has been, but it does not tell you how healthy it is.
What is Profit?
Profit is what is left once the costs of running your business have been taken away from turnover. To return to our cake analogy, profit is the slice you actually get to eat after everyone else has taken theirs.
There are three main types of profit to understand:
- Gross Profit: Turnover minus the direct costs of sales, such as stock, materials, or production costs.
- Operating Profit: What remains after overheads like rent, salaries, and marketing are deducted.
- Net Profit: The final figure after interest, tax, and any other charges are taken away on top of the other costs.
Why Turnover Can Be Misleading
High turnover can give a business owner a false sense of success. A business can be turning over millions yet still be unprofitable.
We regularly meet founders who feel frustrated and confused because, despite strong sales, they are still struggling to pay suppliers or cover overheads.
The pattern is usually the same. Costs creep up faster than revenue. Margins get squeezed. The top line looks impressive, but the bottom line tells a very different story.
The good news:
Thankfully, once businesses start tracking profit alongside turnover, and add in regular cash flow reviews, these problems can be spotted early and corrected before they become critical.
A Simple Example
Imagine your business has turnover of £1 million. After costs of goods sold, your gross profit is £400,000. Subtract overheads such as salaries and rent, and your operating profit falls to £120,000. After tax and interest, you are left with a net profit of just £60,000.
This means your net profit margin is 6 percent. For every £1 of sales, only 6p remains as true profit.
Without looking beyond turnover, you would never know how thin, or risky, that margin really is.
Cash vs Profit
We talk about profit, but that alone does not tell the full story. You can be profitable on paper and still run out of money if cash flow is not managed.
For example, you may be waiting months for customers to pay invoices while suppliers demand payment up front and staff need paying regularly. That mismatch creates a cash squeeze.
This is why turnover, profit, and cash flow must all be tracked together. One without the others gives you a dangerously incomplete picture.
Practical Tips for Founders
- Always track turnover and profit side by side.
- Set profit margin targets as well as sales targets.
- Review gross, operating, and net profit each month, not just turnover.
- Monitor debtor days and creditor days to understand how cash is moving.
- Build a simple monthly finance pack with turnover, gross margin, net profit, and cash balance.
If you feel out of your depth or unsure how to stop confusing turnover with profit, bring in experienced finance support such as a Fractional FD to help you build clarity.
Conclusion
In short, turnover shows how busy you are.
Profit shows whether you are running a healthy business.
Cash flow shows whether you will survive.
Now you know how to stop confusing turnover with profit: one of the most common mistakes founders make. Do not fall into the trap of chasing top-line growth at the expense of the numbers that matter. High turnover makes you sound good. Good profit margin and cash flow makes your business thrive.
If you would like help making sense of your accounts, or if you want to turn growth into lasting profit, get in touch with us.
Our Financial Health Check is designed to help you spot risks early and build a finance function that supports real growth.