I’m trying to channel my inner Deborah Meaden can you help?

[NeverSplitTheDifference]

Hello Mumsnet, I’m going back to self-employment and I’m trying to get a basic understanding of company finances. In Dragons’ Den Deborah Meaden always tells people that they need to understand three numbers: turnover, gross profit and net profit. So I looked these up and got a basic understanding that gross profit means the turnover less what it cost you to buy the stock and ship it.

But my business will be a services business. Does the concept of gross profit apply? If so how would I calculate it?

thank you wise ones

Starling Bank have a brilliant description of all of this. As you are not manufacturing, (buying in and selling), gross profit is not really important. You are not making a profit from materials and components you purchase and then manufacture into something else - like a car for example.

Your net profit matters. Many small businesses work upwards from £0 to get to a daily or hourly rate. So you need to calculate all the costs your rates need to cover. These might be rent, office expenses, taxes, banking charges/accountant, any legal fees and start up costs such as marketing and phone costs, car, equipment etc. Make sure you include everything. Then look at what you can charge. This needs to be reasonable enough to get business and high enough to make a profit. You need to decide what the profit should be to meet your needs. Obviously your charge per day must cover costs but what amount of profit can you generate above costs?

Once you have made the money, you take off the costs to get the net profit. Some costs are allowable against tax so you need to understand what they are and how they are calculated to arrive at a taxable income.

As its a Service I would also look at what your hourly rate will be as a lot of SE people forget to factor themselves into it.
I am not saying charge one per se but if once you work everything out you are on the equivalent of £2 per hour or whatever then you need to have a rethink

Beautifully clear, thank you!

The main goal is to make a profit or you are working for nothing. In a service business you should be ok if you get anough work. Good luck.

Thank you all!
i had a business when the kids were little - all done on word of mouth/trust so had no marketing or credit control issues ie it was efficient. If I was at my computer I was being paid.
I am thinking a bit bigger this time :)

One thing I would point out is you've said both self employment and company in your post. One of these can't be true.

You're either self employed or you're the owner/shareholder/director/office holder of a company. They have a lot of differences so it's important to understand your position.

Have you registered as self employed or have you created a limited company?

And respectfully, a poster above is incorrect.

Service businesses absolutely use gross profit. GP isn't just for manufacturing companies, any direct labour costs for example would be classed as COS (cos of services) and therefore a cost of sale. The manufacturing equivalent is COGS (cost of goods sold). Direct labour is anything attributed directly to the sale of your service. An example might be if you're a cleaner the direct labour cost of the employees actually doing the cleaning, or if you had an IT service desk and you were an IT company it would be their labour costs.

It's a moot point if you don't actually have a company though, and have no employees. If you're self employed and are working alone you won't have a PAYE system so no salary costs to put to costs of sale.

@Acc0untant It was me - noted. However for a sole trader, it’s much easier to know what gross profit is but not really worry about it. Mostly it’s used for buying in and making a profit from components. It’s easier to think about what you spend on running your business and what you need to make to cover expenses. If you are on your own is there an IT desk and a cleaner?

No, you've misunderstood my IT desk and cleaner comment. I was trying to explain how service companies still have GP calculations. If you are a ltd company and your business is cleaning, eg, a 1 woman business where you're a cleaner through your own company then your cost of service, feeding through to your GP would be your salary costs. It's directly attributable to your revenue.
If you had a limited company who offered IT services then your labour costs associated with the IT desk would be those costs of sale.

Costs of sale (either goods sold or services) sit above the line, before expenses.

For example:

Revenue
Minus: Costs of goods/services sold
Equals: Gross profit

Minus: Expenses such as other salaries, motor costs, rent

Equals: Net profit

Of course if the OP doesn't mean "company" and actually just means self employment and is working alone then it will be revenue, minus expenses, equals profit. Sole traders are taxed on their profit, limited companies are taxed as it's own entity and the director/shareholder is taxed on their payrolled salary, benefits + dividends etc. This was my initial point to the OP that she needs to clarify if it's a company or if she's self employed as separate legal entities have separate rules.

I thought she meant working alone as a sole trader. Not yet forming a company.

Possibly so, but she also says "company finances" in her OP which is why I think it's worth clarifying.

Thank you. Limited company.

I was

1. self-employed 2004-2017
2. worked through my Ltd Co 2017-2021
3. employed 1.1.22 to 31.12.24 whilst continuing to use same ltd Co for permitted side hustle
4. now working through same Ltd Co again.

In that case you're not actually self employed, not a huge deal but when looking at tax and accounts it's good to understand the distinction.

Just to make it more complex, if you're claiming UC, even though you aren't self employed their regulations treat you as if you are. (To stop people hiding earnings within companies and claiming UC).

UC?

Ok so today I pitched for some work part of which I’d have to sub-contract.
so I deduct the cost of what I pay the subcontractor to get gross profit, right?

assuming that I pay myself exclusively through dividends….

Will you incur any other costs?

Universal credit.

Dividends are irrelevant to your P&L, you only pay yourself dividends out of profit after tax providing you have enough company reserves.

What's the area of work? When you say contractor are you at risk of needing to use the CIS scheme?

CIS?

Some travel, use of software (pro rated). Not much

Construction Industry Scheme.
Building work, painting and decorating, plumbing (I think), heating systems, lighting etc.

A male dominated industry so I assume not, but you mentioned sub contracting so thought I'd check as both contractors and subcontractors have obligations under the CIS scheme.

You can take £758 a month as salary which will keep you under the income tax bracket but still qualify you for NI credits.

Then pay dividends from profits.

This will reduce your corporation tax.

Just wanted to say thank you for this useful guidance everyone.

Not quite at Meaden standards yet.... but getting there slowly :)

This is why it's important to take professional advice and not the advice of people on the internet who don't know what they're talking about.

Dividends do not reduce your corporation tax.