Nearly everyone in business understands the concept of turnover and profit and the essential differences between them. It is also widely conceived that one of these two elements can be impressive whilst the other disproportionately languishes behind.
The relationship between turnover and profitability are rarely linear in that with each unit sold the net earnings gained from it are likely to vary. This is due to the business having overheads which must first be covered before any profit is achieved and different products and services having varying levels of margin.
The relativity of turnover to profit is more closely matched where the business in question sells a single homogeneous product or service at consistently the same price and has very few fixed costs to contend with.
Three main scenarios can exist in the equation of turnover and profit in terms of business objectives. The first is where turnover is deemed to be the primary objective of the business and thus profit, at least in the short term is seen as having lesser importance.
Typically, in such situations aggressive advertising and reduced price products and services are the hallmark of such an objective in order to generate sales and gain the resultant increase in market share.
In the second scenario profit is the key goal of the business and as such, the organisation might staunchly refuse to engage in any business where a predetermined profit margin is absent.
Whilst the numerical values of sales and the total profit might be lower as a result of this course of action, the business is relatively assured that its profit margins will be upheld. Again such an objective is possible where efficient systems are used to minimise the variable costs of the business to ensure profit margins are maintained.
The common feature in businesses is to attempt to achieve a balance or maximum of both turnover and profitability recognising that adequate gains will not be earned in the absence of sufficient turnover.
To this end budgets and other management tools can be applied within the business to forecast turnover levels based on varying amounts of advertising expenditure and other costs to predict profit levels.
Most businesses offer a range of products and services and frequently used a profit centre approach or some other mechanism for determining which items generate what amount of income and net gain.
This enables then to focus and promote particular lines offering discounts perhaps on more profit generating services.
Eventual profitability is a necessity to sustain any business this must be borne in mind even where net gains is not the immediate objective of the business. Turnover is the starting point for generating any profit and thus must form an integral part of any ambitions to report surpluses from the business’ activities.
