7 Steps to Making a Profit First Instant Assessment with VAT

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a blog featured iamge entitled 7 Steps to Making a Profit First Instant Assessment with VAT

In the book Profit First, Mike Michalowicz innovates the way cash flow is looked at by turning the traditional formula of sales – expenses = profit into sales – profit = expenses. This simple change reframes the thinking of individuals when it comes to spending habits. Michalowicz also introduces the Profit First Instant Assessment, which is a tool for entrepreneurs to see how money can be allocated to maximise their profits. For VAT-registered companies, here is how you can do it.

 

Step 1: Take into consideration your input and output tax and then compute for the real revenue of your business over the past 12 months.

 

The basis of your Instant Assessment is the real revenue number of your business.

The output tax is the additional amount your business charges for VAT. Being a VAT-registered business can affect the revenue you have for the year, depending on the accounting scheme used. A common method for the output tax the Flat Rate Scheme. Businesses who use this charge the full amount of 20% for goods and services rendered. The HMRC is paid a reduced amount of around 13.5% -14.5%, depending on the industry. The difference boosts revenue for the business.

Another common accounting method for VAT is the cash accounting scheme. Under this, you do not have to pay the HMRC the VAT you have not yet received. For example, an invoice in April but is not yet paid until January, will only be recorded in the following year.

Once you get the amount of money your business made in the year, subtract the cost of materials and subcontractors. This is your real revenue. Do not forget that the cost of the materials and subcontractors are also influenced by VAT.

Input tax is the VAT you paid your suppliers, including the VAT on raw materials, business equipment, business utilities, and professional services fees. If your input tax is higher than what goes into the company, you can claim a refund from the HMRC. 

 

Step 2: In the table below, pick the column that corresponds to your real revenue.

 

 ABCDEF
Real Revenue Range£0-£250K£250K-£500K£500K-£1M£1M-£5M£5M-£10M£10M-£50M
Real Revenue100%100%100%100%100%100%
Profit5%10%15%10%15%20%
Owner’s Pay50%35%20%10%5%0%
Tax15%15%15%15%15%15%
Operating Expenses30%40%50%65%65%65%

 

Step 3: Fill in the information in the Actual column using data from the last 12 months.

 

 ActualPF%PF£The BleedThe Fix
Top Line Revenue     
Materials and Subs     
Real Revenue 100%   
Profit     
Owner’s Pay     
Tax     
Operating Expenses     

 

Step 4: Complete the PF% using the percentages applicable to you from Step 2. 

 

Step 5: Multiply the Real Revenue number in the Actual column with each PF%. Fill in your answers in the appropriate PF£ row.

 

Step 6: Subtract the PF£ number from the Actual number in each row and input the difference in the Bleed column. It is possible that you can get a negative number as a result.

 

Step 7: If you get a negative number In the Bleed column, write “increase” in the Fix column. Write “decrease” if the number is positive. The Fix column shows if spending should increase or decrease, while the Bleed column indicates by how much.

 

The steps involved in the Profit First Instant Assessment might seem tedious, especially taking into consideration VAT. But the benefits for the business can make it worthwhile. It is designed so business owners can see in a nutshell how to spend resources and can ultimately lead to a more efficiently run business.

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.