How do I improve my earnings from my business?
If you have been in business for a while and do not have the income you were anticipating there are a few things you need to consider.
Profit
The profit is the money you are left with after you have deducted your business expenses from the income you have received from selling your goods or services. This is known as your Net Profit and this is the amount of money your business is making. However, not all of this profit is yours to spend. You will have to pay tax on this amount whether you are a limited company, a sole trader or a partnership. A limited company will pay 19% of this in corporation tax and a sole trader will pay tax and NI on the balance after the personal tax free allowance (currently £12,570) is deducted. A partnership will share the profits amongst the partners and pay tax on their share after the personal tax free allowance has been deducted.
So if you are taking all your profit as your own earnings you will not leave enough to pay your taxes.
Bank Balance v Profit
Why does the balance of your bank account not equal your profit? This is a question I am frequently asked.
Everything which comes into or goes out of your bank account affects the balance but it does not necessarily affect the profit. For example, anything you pay for which is personal does not reduce the profit but it reduces your bank balance. If you are repaying a loan or a hire purchase agreement these payments will reduce your bank balance but will not reduce your profit as they are not a trading expense. If you are VAT registered the VAT payment or VAT refund you receive is not a trading expense or a trading income so it doesn't alter the profit but it does increase or decrease your bank balance.
There are lots of things which go in and out of the bank which affect the balance but do not affect your profit.
Improve your earnings
There are just two main ways of increasing your profit and thereby improving the earnings you take out of your business.
- Increase Sales
- Reduce Costs
Increase Sales
A business owner needs to know that they are charging enough for their sales to provide enough income to cover the costs of the business, to pay taxes and ultimately provide you with the earnings you would like. If the business is VAT registered the income from sales needs to be 20% more than you have calculated your selling price to be because, once VAT registered, you are a collector of taxes and are responsible for paying this 20% (which you have collected from your customers) to HMRC.
There may only be one selling price in your business because if you charged more you would lose business. This is something you need to weigh up because if the price you calculate is more than customers will pay you need to reduce your costs to make more profit at the standard price or you need to make more sales at the standard price.
Reduce Costs
Take a look at all the costs which are going out of your business during a year and see which ones are really necessary and if they are necessary can they be reduced by finding an alternative supplier. Sometimes it is worth paying more if your supplier provides the quality and service you need as cheaper is not necessarily better for your business. Consider every cost, regular as well as one off purchases. Reducing your costs and your overheads will give you more profit but don't get rid of the costs which are beneficial for your business. Those costs may be bookkeeping and payroll which give you peace of mind and give you back time to work on or in your business, or business support which helps you to manage other aspects of your business. Insurance is another cost which you shouldn't skimp on but perhaps could be reduced by changing insurers.
Everything you pay for out of your business is a cost, whether it is a business expense or a personal expense. Every payment reduces the cash you have available to invest in your business, pay your VAT or tax or take as personal income. You are reducing the availability of cash if you think it is OK to get parking fines and pay for them out of the business, buy your lunch every day from your business account or take customers for dinner. None of these are business expenses and just reduce your bank balance.
Keep Track
Keeping your accounts regularly up to date will ensure you know what your profit is and will enable you to work out what you need to do to increase your profit. It will enable you to plan how you are going to pay for significant expenses - a new company vehicle, your VAT or tax bill, or some new equipment which you are desperate to get. Don't rely on your bank balance to tell you the health of your business because you may get a shock when you receive a large tax bill because the profit you have made is so much more than you have in your bank.
Finally
Don't pay for personal expenses out of your business bank account. It is very difficult to keep track of how much you are taking out of the business each month and the total often comes as a surprise to those who think they don't have much income. A regular weekly or monthly payment to your personal account means you know exactly how much you are taking and therefore what you have available to spend personally.
You might have an idea of how much you need to earn to cover your personal needs but if your business isn't making that level of profit after tax it is not available for you to take. If you drain your business of cash because you need more to live on you will end up owing HMRC and your suppliers and you will be in a downward spiral.
Build your business by increasing your income and/or reducing your costs and you will gradually be able to build up to have the income you were anticipating.