Why are you in business? What do you want to achieve? Interesting questions that I don’t think many people really address. If you are in business, you have various responsibilities to the Government, other regulators and those around you. Being in business, you have a duty to your family and everyone else relying on you. That duty is to make a profit.
So, what is profit? I have come to the conclusion that only a few, generally self-employed, people really understand what we mean by profit.
Here is a simplified example to illustrate the basic principle.
Let’s say you buy in “stuff” and then you sell it. You are what I would call a box shifter. You buy them at £4 each and you sell them for £5 each. If you buy and sell just one item, you make a gross profit of £1.
But you have overheads such as wages, rent, rates, electricity, motor expenses, professional fees etc. and let’s say for the sake of argument that these amount to £10 and are not affected by the level of your sales.
You need to sell 10 items on which you make a gross profit of £1 each in order to break even, i.e. cover your overheads of £10. If you sell 15 items, you make a profit of £5 (15 x £1 less £10) and then that well-known firm of Johnson and Sunak will want a £1 in tax, roughly speaking, from you leaving you with a profit after tax of £4.
That profit after tax has got to pay for equipment, pay off capital loans and unless you trade through a company, provide the living to support you and your family.
I know this is a simplified picture, but I think you should get the point.
So, profit is far from a dirty word, no matter what you hear on the media. It is the essence of any business because without it there is no business. I came across this quote a few years ago and it resonated with me:
Profit is like oxygen, food, water and blood for the body; they are not the point of life, but without them, there is no life.
“Built to Last” by James C. Collins and Jerry I. Porras
Not only is there no business without profit, if there is insufficient profit, there is no money for investment in machinery and equipment. There is also not enough money to support all the people who rely on you and your business for their own livelihood. These include everyone on your payroll as well as your own family.
It is therefore your responsibility to make profit. It is your duty to support the people who have placed their faith in you and your abilities, whether you are related to them or not.
The media makes a song and dance about large companies and the millions of pounds they make in profit. But at the end of the day, these companies are just like you and me. It is just that their accounts have more zeros in them. They still need to invest and they need to continue to pay the wages of their employees and also provide income for their owners, the shareholders. The only difference is that their numbers are bigger.
In a similar vein, the media makes a lot of the tax that large, mainly multinational companies, manage not to pay. But HMRC recognised that the biggest hole in the national tax revenues drives from small traders. You don’t hear much in the media about that, because it is not so newsworthy as having a go at large faceless companies. They are not going to pick on a joiner or sparky for doing cash jobs or homers and not declaring the income. The HMRC answer is MTD, forcing all small businesses to keep digital records so there is less likelihood of any income being under reported.
We are in the transition. MTD for VAT registered businesses trading above a turnover of £85,000 is already here. VAT registered businesses below the VAT threshold must register for MTD ready for April. There are 2.7 million businesses that should be within MTD this year. Of these, around 1 million still have to register for MTD and of this million, about a third are businesses trading above the VAT threshold that should already have been registered.
In 2024, MTD for sole traders will commence with quarterly reporting of results. In the following years, we will see MTD for partnerships and companies being introduced.
The future is going to be an interesting one and the future starts tomorrow. There are big changes happening already and they are going to continue. In order to protect your own financial position, your family and all those others who rely upon you, it is now more important than ever that you maximise your profit within your business. I know that means that Messrs. Johnstone and Sunak get more, but so do you and yours.
Your mission, if you choose to accept it, is to generate profit.
If you want to carry on this discussion but you are not sure where to find us, please click here.
Alan E Long
The Long Partnership