7 profit principles to improve your business
There is a saying ‘Turnover is vanity, profit is sanity, cash flow is reality’, but when people look at business success, it’s turnover that is usually quoted first. Improving your profitability doesn’t necessarily mean putting your prices up, although you should be reviewing them regularly in line with the current economy. These are our top tips to keep your business profitably healthy.
- Review your customers. Who are your top customers and which customers eat up your time and, subsequently make no profit? Maybe increase prices on the non-profitable customers in line with the effort it takes to keep them, and if they leave use the resources freed up to work on the customers who actually make a profit for your business.
- Develop a plan on how you retain and attract more of the top type of customer. If you know what a perfect customer looks like, their challenges and how you can help them, your marketing efforts will be much more highly focused.
- Set yourself some incentives by rewarding yourself with short term profit performance bonuses. Review your financial performance quarterly and pay yourself a dividend bonus on any increase above baseline. This will ensure you’re motivated to bring in more business!
- Could your employees be more productive or creative? Would you be willing to offer incentives for increased efficiency or output? You might be surprised at some of the clever ideas your team have – you just have to ask!
- Optimise tax efficiency by claiming available tax reliefs, i.e. electric cars, capital allowances, use of home as office provision, spouse salary* and pensions.
- Create a sufficient cash flow to pay suppliers and tax on time. Build a pot of excess funds for a rainy day, investment in the business or to reward employees and, of course, you as the business owner.
- Measure and monitor performance by looking at monthly or quarterly management accounts. Compare turnover to budget, gross profit margin to budget, overheads to budget. The more in touch with your financials and operating costs you are, the better you can plan and see what needs to be changed.
Are you maximising profit extraction options?
If you follow the above strategies, your bottom line should be healthier. Now for the bit where, as a business owner, you reap the rewards for your efforts. These three strategies will ensure your business pays you (and your family) what you’re entitled to – and will benefit the business too, by reducing corporation tax.
1: Pay your family!
If you have a spouse (*see above) or adult children who earn no income or minimal income, you can pay them a salary if they perform any work for the company. This needs to be at least national living wage and makes use of their personal allowance and basic rate band. It saves the company corporation tax and puts funds into the family pot at lower tax rates than if the business owner paid themselves as a salary or dividend.
2: Do you have alphabet shares in place?
With ordinary shares, dividends have to be paid in line with shareholding, e.g. 50%, but if you have different categories of shares, e.g. A shares, B shares, C shares, etc. they carry the same voting rights and capital share on winding up the company, but can have variable dividends, as agreed by the company directors.
This allows flexible dividend payments between shareholders and, with a husband and wife, can help to ensure maximum profits are taken whilst keeping both spouses as basic rate tax payers or ensuring the business owner does not go over the £100k income level and start losing their personal allowance.
3: Keep up with expenses
If you pay personally for items relating to the business, are you making a claim for these? It’s easy to overlook small amounts, but they mount up. When you claim your expenses, it results in a corporation tax saving for the company and also a reimbursement to the business owner (that’s you!), which is tax free income for the business owner. Get into the habit of submitting your expenses claim – most accounting software makes this easy with apps that scan receipts and put them straight into the accounting system.
If you need any advice or assistance then feel free to get in touch with the expert Cook & Partners team and we’ll be able to assist you!
