Try to be realistic when considering how much of your product or
service you can sell. It is better to be slightly conservative so that
you build in a contingency if things don’t go quite to plan. You can
still set yourself a ‘blue sky’ target as well, to provide a stretching
goal for yourself.
Running costs
Once you have calculated how much of your product or service you can
sell in a year, deduct the estimated annual costs of running the business
(sometimes called expenses, overheads or expenditure). Whatever is left
over is your profi t (or loss, as the case may be).
When preparing the budget do not forget to include a salary for
yourself, at whatever level you need to meet:
personal expenses such as home loan payments
w
council taxes
w
strata levies
w
food
w
general living expenses.
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Remember that the fi gure you put in your budget for your salary
will be before tax. You need to ‘gross up’ the fi gure you have
arrived at for your personal expenses by your expected marginal
rate of tax, to arrive at the pre-tax fi gure for your budget.
If, after preparing the budget, you end up with a profi t, think about
how big that profi t is. If it is only a small profi t, then any minor change
in your income or your expenditure could wipe out that profi t and turn it
into a loss.
Think of ways in which you may be able to increase the volumes you can
sell, or the price you are selling at, or ways of decreasing your expenditure,
so that the profi t fi gure is as big as you can make it. This will provide you
with a good feel for the level of risk you are taking on.
Running your business from home rather than renting an offi ce can
help keep your expenses down and could save a lot of expenditure
on rent.
The lower the profi t the higher the risk and, conversely, the higher
the profi t the lower the risk.
ACCOUNTING FOR NON-ACCOUNTANTS 35
Accounting DiZign.indd 35 15/2/06 9:51:43 AM
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