Why upside down accounting?
Now we know what you want to earn, at the three different levels, we can start to work backwards from this and work out what you need to sell. And then we can work out what you need to charge. And then we can get on to the clever bits.
By starting at the very bottom of your profit and loss account (the money that goes into your pocket to spend on yourself) we will work upwards to calculate your sales.
Your target income figures are based on the amount of money you want to go directly into your pocket or at least into your personal bank account.
These are not the same as your net profit
Your net profit is what your business will produce for you – but it’s not what you get to spend. Unfortunately. This article explains in more detail how the money in your business is whittled away at the different stages…
It can be difficult to work out exactly how much net profit your business needs to create to give you the right amount of money in your pocket because you don’t automatically know how much tax you’re going to pay on your net profit. I’ve done these calculations for you in a handy look-up table so you can set the correct net profit target for your business.
Here’s the table for a UK limited company based business.
Note – if you’re outside of the UK so pay tax in a different way, you can calculate this for yourself by googling dividend calculator in your location. Sorry that it’s not possible to do the look up sheet for all locations
Once you’ve done this, you should have a clear figure for how much net profit you need to create in your business to give you the target income figure in your personal bank account.
Time for the next bit – let’s work out your overheads…