You’ll already have the sense, I think, that everybody wants to chip away at the amount of money that you make before it ends up in your wallet. There’s nothing I can do to stop you having to pay that tax, but what I can do is help you plan out your path and make sure that you know where all the money is going to disappear to. That way you won’t have any nasty surprises.
There’s a great story in the main book about how I didn’t take account of all the different ways in which my money was nibbled away when I was first starting out.
Nibble number 1 – overheads
The next area in our upside down accounting where your money almost magically disappears is your overheads. If you’re already familiar with this, you can just look at your last 12 months accounts and find the figure for your overheads, add back your directors salary (as that’s money in your pocket) and pop them with the other figures into this profit and loss sheet
For the rest of us, here’s what overheads are all about.
Overheads are all the things in your business that you need to pay for whether you sell £1000 of stuff or a million pounds of stuff. They are also called fixed costs, because… well, they’re fixed. They don’t change if you sell more. If you have a business that sells your time, rather than actual things, your overheads are probably all of your costs.
We need to get a grip on what your overheads are before we can set your sales targets.
Here’s the sheet to work out what your overheads are going to be for the next year. Remember that you might want to increase your marketing budget a little bit (or a big bit) so we can do some more work on making you look great to support you charging a little bit more.
How to add back the weird things your accountant adds in
My accountant says that my overheads were £22,466. But I know that that included 12 payments of my directors salary of £671 per month, or £8052 over the year. I therefore take that away from my overheads because that £8052 was money which went into my personal bank account as salary.
If you also claimed “working from home allowance”, or other tax allowances for things that you’d normally pay for yourself, take those off the overheads too, so you end up with a more accurate figure.
Nibble 2 – Cost of Goods Sold
This is where it gets really interesting. If you just sell your time or you sell something like software that doesn’t cost money each time you sell it, I’m afraid you won’t be able to play with the Cost of Goods Sold bit here. You can read it, but it probably won’t apply to you.
Cost of Goods Sold is the amount it costs you to make each thing that you sell. Here’s a quick version of the story of Quilt Guy you’ll find in the book.
Quilt Guy sells handmade quilts. Each one costs him money to make…he has to pay for the silk, the padding, the edging, tissue paper and bits and pieces he uses for each quilt he makes. And now, Quilt Guy is getting busy, so he’s paying someone else £250 to make some of the quilts for him.
His Cost of Goods Sold add up to £347 per quilt.
These aren’t overheads because they’re not fixed costs Quilt Guy would have anyway for running his business. If he sells 10 quilts his total Cost of Goods Sold would be £3470, and if he sells 100 quilts his total Cost of Goods Sold adds up to £34,700.
Of course, Quilt Guy has to take these costs into account when planning how much he’s going to charge for each quilt. Fortunately, he bought the Sweetspot Pricing Resource Pack so he knows that he would be daft to just sell his quilts as a multiple of the cost of making them. Otherwise, he’d have to sell the ones he makes for a cheaper price than the ones someone else makes for him! He’s going to charge a good rate for his beautiful quilts, based on how many he thinks he can sell, and how much he wants to earn.
Which takes us to the next step of planning your sales