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

I'd say that even a service company business will have "costs of sales" to deduct before arriving at gross profit. For a start, any costs that you re-charge to the client, such as if you re-charge your travel expenses, or a contribution towards phone call costs, or any specific equipment that you need to buy to do that particular job, or subcontractor costs etc.

Pension costs - if you were employed anywhere else, you’d get a pension. Don’t shortchange your top employee: you

@Acc0untant agreed.

The salary, however, does.

This is why it's important to not take advice from the internet because your original post definitely reads as though divideds will reduce corporation tax.

£758pm is also not the most tax efficient salary this year for most small companies with either no or very few employees.

Another way to look at Gross Profit is that the costs that you deduct from your turnover to reach the GP£ is the variable costs of generating that income.

The net profit is then reached after deducting the admin, running and fixed costs of the business.

It can then be used, for example, to identify what turnover you want to achieve to reach a certain profit level. i.e. if you subcontracted all your work and put a 50% increase on your subbie's rate (i.e. they charge you £200 a day and you charge them out at £300), your gross profit is 33% (£100 / 300).

If your running and fixed costs are going to be £10,000 a year, you know you need to earn at least £10,000 in gross profit to cover it, which would be £30,000 in income.

Obviously yours would be more nuanced than this as you'll be doing work that generates income with no variable cost associated with it.

Filing company accounts and determining the best tax strategy for you can be quite complex, so I would very much recommend finding a good accountant to help you with the Companies House and HMRC filings, as well as your own personal tax affairs and the company's payroll.

If your turnover is likely to reach £90,000 in any rolling 12 month period you'll need to register for VAT too, so you'll need to be using appropriate software to keep your accounting records and submit your VAT returns.

I'd recommend using some compliant software anyway (Xero and Quickbooks are the best IMHO) as it will make the year end process easier.

Finally, please remember that you and your company are two separate entities. Even if you own 100% of the company, the money that's in the company's bank account does not belong to you.

I always recommend that clients set aside a certain % of their company's income to go towards their corporation tax bill (for service company clients this is regularly around 15% - not 100% accurate, but not normally too far off). What is then left is available for you to take as your earnings (salary/dividend). I'd recommend just taking lump sums when you need it, ideally just drawing down a monthly amount, rather than putting personal spends through a company bank account.

Finally, take what you need from your company, but don't take any more than you need. It's better for tax planning purposes for us to have the ability to vote you extra dividends if the profits allow, than for us to get to the end of the year and discover that you've taken more than you were officially entitled to.

I always say to my clients that don't live off beans and toast while your company is rolling in it, but it's better for your company savings to have more money than your personal savings.

If there's spare available in your tax bands at the end of the year, we can vote you extra dividends that you can draw out later as a lump sum.

Too many of my clients ignore this advice and then end up in a situation where they've taken too much money, we can't vote them enough dividends to cover what they've taken and they have to scrabble around to find the money to pay the corporation tax because they've already spent it on a nice holiday!