Bigger Business Part 3: Profit and Pricing

moneyWhen you are making your business plans, you need to be clear how you will make your company profitable. This applies from the smallest company up.  Will you be supplying wholesale? If so, you need to calculate in margins so that your retailers can make a profit. They will want around 50 per cent profit after VAT, and you need to cover your materials, time, marketing and distribution costs too.

VAT

Think about VAT registration early on. You need to register once your turnover exceeds a certain threshhold. This figure increases by a small amount annually, so check current figures. Even if you aren’t registered for VAT when you start out, consider allowing for it in your prices. Otherwise, an increase of 20 per cent can either be a nasty shock for your customers, or make an unpleasant dent in your profits. Yes, you can claim back VAT that you spend too, but make sure you do your sums.

Payment terms

Plan out your payment terms. Acceptable terms can vary, depending on the sector you work in. A standard invoice may request payment within 30, 60 or even 90 days. Work out your cash flow so your customers pay you in time for you to pay your bills.  Will you need an overdraft at some times of the year? If you are dealing with large amounts of money coming in and out, you may need to look at debt factoring. You sell your invoices on to a company which will give you in the region of 85 per cent of their value straight away. They then take on responsibility for chasing up the payment, for a fee. This gives you access to money you are owed more quickly, but obviously at a price. Consult a solicitor before setting up this sort of arrangement.

Your income

If the family will be relying on your business, you need to establish the income you draw from the business. Make this part of your business plan. Some people plan in a regular ‘salary’ of a fixed amount each month, while others take whatever is left, or what they need.

 

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