Everyone who starts working for themselves has a reason for doing that. It may be to provide customers with a better service, it may be to work less or make more money for yourself than being employed. Whatever the reason, being in business is also about making enough money to pay your bills and leave you enough to live on and pay your taxes.
In the beginning this may not be the case as there are start up costs and many businesses will make a loss in their first year. Or you will have to get a second job to provide yourself with the income you need whilst you develop your business. It would be rare to find someone who could just go from being employed to having their own business without any issues with finance. Many business owners will have been saving to start up on their own or will have been working on their own business whilst still employed.
Every business owner has differing income needs and often one of the drivers for being self-employed and setting up a business is to earn more than you are currently being paid as an employee. Whatever the reason, creating enough income to pay your personal bills and develop the lifestyle you dream of means making a profit in your business.
Sometimes that profit will only come by growing your business and employing people but some businesses can make enough profit for themselves without relying on others.
Should you be in business?
You are in business whether you are working for yourself or are employing people. Being in business means providing goods or services to your customers for payment and obviously you need to sell your time or your goods for more than it costs to run your business.
However some people in business have no idea what it costs to run their business on a monthly basis and don't have enough profit to pay for the lifestyle they have. If you don't have an understanding of your business costs in relation to your income and don't seek help to get this right then your business will just get more and more into debt.
Businesses have fixed costs
Every business has fixed costs. At a minimum these will be telephone, insurance and software but possibly also rent, rates, and company vehicle running costs. These fixed costs have to be paid however much your income is so you need to know how much income you need each month to cover these fixed costs. Your own income is not classed as a fixed cost unless you are on the payroll for your limited company so if your income only just covers your outgoings you will not be left with any earnings for yourself.
Calculate the income you need to receive monthly
- Monthly overheads (telephone, insurance, etc)
- Plus costs necessary to create your sale(goods or any aspect related to the service you provide)
- Plus the income you would like to take
- Plus an amount for your potential tax bill
This will give you a break-even figure. You will need to have an income greater than this to create a profit to re-invest in your business if you want more or new software, to change your vehicle, to buy additional tools, have more earnings, etc:
Can you increase your prices?
You need to be realistic about what you can charge your customers. There is no point calculating what profit you need to make to give you the income you want if the cost is too high in your industry for your customer to pay.
If you need to charge more to achieve what you need you will have to either find a niche market which will pay that, reduce your costs or reduce your earning expectations (at least until your business is established and growing). Alternatively you can employ one or more people who can help increase your income because more work can be taken on but of course this will increase your overheads.
Increasing prices may require VAT Registration
The VAT threshold hasn't changed for a few years so more and more businesses who need to charge more to cover their costs are finding that they need to become VAT registered.
Once you have reached the VAT threshold of £85,000 over a 12 month period you will need to increase your customer charges by 20% but you will be able to claim back VAT on your expenses (unless you choose the flat rate scheme). This will, of course, increase your income but the additional 20% is not yours to spend so should not be accounted for in your profit calculation.
Becoming VAT registered may not matter if your customers are all businesses which are VAT registered as they can claim back the VAT you charge, but you may find you lose customers if they are domestic customers because they don't want to pay the additional 20%. Businesses which sell goods in a shop, or similar, will include the 20% VAT in their pricing so the customer doesn't know there is an additional 20% on top, but businesses that invoice will have to show the extra VAT element they are charging.
Businesses who understand what they need to earn each day, week or month to cover their costs can better manage their business and their lifestyle.
Each business must work out whether it is financially viable for them to work less days during the week, whether having an employee means better profit despite the additional cost or whether increasing income pushes you into being VAT registered which may not be beneficial for your business.
Keeping your accounts accurate and up to date will enable you to make informed decisions about your business and a bookkeeper will help you with this. Your bookkeeper should be able to tell you costs of running your business and will work through various scenarios with you to ensure you are achieving what you need to achieve.