Running a business, whether that’s as a contractor or otherwise, it’s vital that you stay on top of the numbers. Knowing whether you’re making a profit and whether or not you have enough cash is vital to ensuring you survive and thrive.
And yet many people we meet really struggle with this. Even when they’re using our fantastic service, it just sometimes seems like a foreign language.
So let’s go back to basics.
Sales:
Every business has Sales. In accounting terms, these can sometimes be called Revenues or Income. But they’re just sales. Whatever it is that you get paid for doing what you do.
Cost of Sales:
You then may have what are called Cost of Sales, sometimes known as Direct Costs. These are costs you have to incur before you can sell something. In retail it would be your stock. As a designer, it will be the materials you use to make your end product. And so on. Contractors generally don’t have cost of sales unless you subcontract work.
Gross Profit:
We deduct the cost of sales from sales to arrive at Gross Profit – which is how much profit you make on a sale. For instance, if you buy a dress for £50 and sell it for £100, you’ve made a Gross Profit of £50.
Overheads:
Every business then has Overheads. These can also be known as Operating Costs or Indirect Costs. These are the other costs you incur to run your business, such as wages, rent, rates, power, IT, phones, marketing etc. It will also include accountancy fees!
Net Profit:
To arrive at your Net Profit, we deduct the total Overhead cost from your Gross Profit. Simples! And in general, it’s this Net Profit figure that you pay tax on, but how that tax is calculated is a whole other blog altogether!
Retained Profit:
For limited companies, and definitely for the majority of contractors, you will pay yourself mainly by Dividends. This is the most tax efficient way – meaning more money in your pocket. Those dividends are deducted from your Net Profit to arrive at the final figure – Retained Profits.
If this all still feels too complicated, then why not pop in and see us, or pick up the phone. We’d be delighted to run through it with you. Simple! Get in touch today!
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