Turnover is the number that gets mentioned at barbecues. 'We hit two million this year' sounds impressive, and it's a genuine milestone.
But on its own, turnover tells you surprisingly little about whether your business is actually healthy. What you keep matters far more than what comes through the door.
Turnover vs margin: what's the difference?
Turnover is your total sales, the money coming in before any costs.
Gross profit margin is what's left after the direct costs of delivering your product or service, shown as a percentage of sales.
Net profit margin is what's left after everything, including rent, wages, software and all the other overheads.
Turnover shows how busy you are. Margin shows how well that busyness is paying off.
Two businesses, one surprising result
Here's an illustrative example (the figures do not reflect any of our clients, it is a common pattern we see).
|
Business A |
Business B |
|
|
Turnover |
$2,000,000 |
$1,200,000 |
|
Gross margin |
20% |
45% |
|
Gross profit |
$400,000 |
$540,000 |
Business A looks bigger. Business B has $140,000 more to cover its overheads and reinvest in growth, while doing $800,000 less in sales. Which one would you rather own?
Why chasing turnover can backfire
More sales feel like progress, but growth at a thin margin can quietly create problems.
More sales can mean more pressure on cash
More work often means more staff, more stock and more money tied up in unpaid invoices. If margins are thin, cash can get tighter just as the business gets busier. (Part 2 of the series covers why cash flow and profit aren't the same.)
Discounting costs more than it looks
Say a product sells for $100 and costs $70 to deliver, a 30% margin. Offer a 10% discount and you're now making $20 per sale instead of $30. To earn the same gross profit, you'd need to sell 50% more.
Busy isn't the same as profitable
If you're flat out but never seem to get ahead, low profit margins are often the reason.
What causes low profit margins?
Some of the most common causes we come across:
Break-even analysis puts margin in perspective
Your break-even point is the level of sales you need just to cover your costs. A simple way to estimate it is to divide your fixed costs by your gross margin percentage.
Using illustrative numbers: with $300,000 in fixed costs and a 30% gross margin, you need $1,000,000 in sales to break even. If your margin slips to 25%, that jumps to $1,200,000.
A five percentage point drop in margin means an extra $200,000 in sales just to stand still. That's why small margin changes deserve big attention.
Simple ways to start protecting your margins
How a CFO helps with profit improvement
Our CFOs dig into where your profit is really coming from, and where it's leaking. We look at pricing, cost structures, product and client mix, and break-even points, then help you build a plan to strengthen profitability over time.
Whether you work with us as an outsourced CFO for a few hours a month or more regularly, the aim is the same: helping you grow in a way that actually adds to your bottom line.
Quick answers
Is turnover or profit margin more important?
Both matter, but margin tells you more about the health of your business. Strong turnover with weak margins can still leave a business struggling for cash and profit.
What's the difference between gross margin and net margin?
Gross margin is what's left after direct costs. Net margin is what's left after all costs, including overheads.
How do I calculate my break-even point?
A simple estimate is your fixed costs divided by your gross margin percentage. A CFO can help you refine this for your business.
Want to understand what your margins are really telling you? Get in touch with the Square Penny team on 1300 472 412 or visit squarepenny.com.au.