Traditionally, we have been told to first determine 1) the sales and turnover, 2) the cost of sales (CoS) and 3) all fixed and variable expenses of a business, before being able to work out the net profit.
“Expenses always rise to meet your turnover,” the saying goes, and without proper planning and budgeting, it will turn out to be true, and that means NO profit for you or your new business.
It's pretty simple - without profits, why are you in business?
More recent thinking tells us to start our calculations with net profit as our basis.
How to calculate your desired net profit
You should already have a mission, vision and goals.
Check out The Springboard Academy’s previous tips about these topics .
You should also have decided how you want to fulfill your purpose and “pay-it-forward” once your business is successfully up and running.
To calculate your desired net profit (NP):
Decide how much you want to pay forward, and to whom. Call this X.
Recognise that your business needs some reserves for growth, and work out an annual amount. Call this Y.
Know what dividend you want to be paid (like a bonus). Call this Z.
Therefore, NP = X + Y + Z
NP is also the result of: Turnover – Cost of Sales - Fixed expenses
Sales and expenses
Both your market analysis and marketing plan will help you determine how much of the market you want to, and plan to capture. These sales convert into turnover.
The way you have structured your business will help you to work out your expenses.
You are aware of the processes you need to follow, what kind of equipment you need, how many people you would like in your employ, and what costs you are likely to incur for rent, telephone bills, etc.
Probably the biggest expense of the business will be YOU, and you need a well-structured plan to know how much to pay yourself, and how.
See next week’s Blog post on how to complete a personal budget, and determine your owner’s remuneration
Congratulations! You are one step closer to having a basic financial plan for your business.
Pro 12:15 The way of a fool is right in his own eyes, but a wise man listens to advice.