Make Money and KEEP it!

Make Money and KEEP it!

5 December 2022

Strolling down to my accountants I was full of life, I had around 60k in the business bank and I knew I had a pretty good year last year so was fully expecting him to tell me I could take the full 60k out and spend it as I please.

I had never even had 10 grand before let alone 60! – Family cruise? New motor or maybe I would buy a nice motorbike, all these luxuries were going through my mind as I swung open his door like a boss!

          “There nothing to take Daren”

Excuse me were the first words that left my mouth as my tail slowly went back between my legs!

In a nutshell it was November and my year end (business financial year) was 28th March earlier in the year. I had invested in new tools around February that year and bought a new van and a bunch of other stuff I really didn’t have to and long story short by the time I paid my corporation tax, vat etc etc there was literally going to be nothing left to take.

This lesson and it was a lesson was one I would never make again in business. I didn’t have a business coach back near me then and there was no business coach online so I had nobody to keep me right about this, online business coaching and zoom business coaching hadn’t really taken off yet and let’s face it accountants simply tick boxes these days so he wasn’t much help either in advising me properly on the bear way to spend money.

In business especially trade businesses it’s very difficult to have ‘real time’ numbers. With jobs running into different months, quarters and years and deposits and stage payments paid at different times it’s tough to know exactly where your at, mix that in with suppliers and sub contractors who’s invoices are so sporadic or outdated it near impossible to get your profit exact until well after year end.

However that doesn’t mean we lose track like I did…

Within minutes of leaving the accountants office I set about finding something or someone to help me figure this out and I did. I spoke with business mentors (turns out there were lots!) and then stumbled across a book called profit first and my life changed…….

I could use this blog to tell you all about this book by the brilliant Mike Michalowicz but I would do it an injustice – Go and buy the book and figure it out yourself.

Ensuring my business finances were in order was now my number one priority and building the business bank balance was the goal however whilst doing this is was imperative that I stuck money away monthly for tax and profit and then and ONLY THEN could I splash out on new machinery, tools, uniform, events etc – when my profit (and tax) was paid FIRST.

Link below for Profit First Book (Please note link is for the trades version which I haven’t read and I’m sure is better for trades businesses, for other small businesses the original is perfect.

https://www.amazon.co.uk/product-reviews/B08FBMXPB4/ref=cm_cr_othr_d_show_all_btm?ie=UTF8&reviewerType=all_reviews

So what lesson did I learn that day………….

The biggest lesson I learnt was that what is in the business account is literally never what profit you have made, there are so many differences as above that it would be literally impossible to calculate profit this way and that the only way to calculate profit was knowing your numbers in your business.

I needed to figure out all my overheads, what VAT was due and when, how much my labour costs were and that it would be much easier to work out my profit at the end of each month (knowing that it was never going to be exact even monthly)

– How much does it cost to run your business weekly – overheads (fuel, rent, phone, van costs – insurance, tax, maintenance etc, marketing and so on) these prices are pretty much nailed on every month and rarely vary too much

– How much are wages every week – This should remain fairly stable

– Total Price of materials per job including contingencies

This would then give me a rough indication of how much money i was making per month and at this point it’s advisable to put 19% away for corporation tax (tax on profit)

A simple calculation……

July Turnover (All sales into business account) £75,000

Cost of sale (Materials, plant, labour etc) £25,000

GROSS PROFIT – £50,000 THIS IS NOT YOUR PROFIT YET

Overheads (rent, fuel, office, marketing) £10,000

Nett profit BEFORE tax £40,000

19% (C/Tax) of 40k = £7,600

Total Nett profit = £32,400 (you have to pay personal tax of this at 20-40%) 

Move £30,000 into your profit account and leave it there. this leaves £2,400 in your business working/current account PLUS whatever was left over from previous months and THIS money is what you use to ‘run your business’ and buy diggers, uniforms etc etc NOT the 30k profit first money. **You may decide on a smaller amount of 15-20k it’s up to you.

This money is YOURS and at year end based on this calculation you will have £360,000 to deduct from your company.

and the taxman will be rubbing his hands as you will of course go up into the 40% tax bracket so at this point you NEED professional financial advice on how to spend the money. This is where having a spouse on the directorship helps.

Options to spend your money tax efficiently could be Pensions, Sass Pensions or of course re-invest it in the company but always try to re-invest it in stuff thats going to make you more money! (example – Buy an expensive machine that gets the job sone 50% quicker NOT a machine that is simply ‘newer’ for the sake of it or buy another van providing it’s going to create another team)

As mentioned above I didn’t have a business coach near me nor an online business coach back then so I had to figure this out myself through reading brilliant business books like above however later on I invested in a business coach who re-affirmed everything and gave me a few other tips to utilise monies and keep everything above board.

In my personal opinion it was always safer to keep everything legit and above board, not only did I sleep better but by paying the relevant taxes I was able to extract hundreds of thousands from my business which over the years I invested into property home and abroad which in turn enabled me to create wealth through property and dividends.

One of my regrets though was pensions – I could (and 100% should have) paid my full allocation of 40k per year per person into my pension account, I paid nominal fees into this when we could easily have invested the 40k per year – it’s tax free!!

Lastly it’s worth noting that having a business that is consistently taking profit makes it even more sellable therefore not only are you getting a tidy profit each year but you are adding to the value of the business for any would-be buyer.

DISCLAIMER – I am not a tax specialist I am merely informing you of what system I used to gain financial freedom in business and in life