WHAT HAPPENS AFTER PROFIT?
So you’ve received your end of year Financial Statements from your Accountant and whether your business has generated a profit or a loss, it just doesn’t mean much. Right? That’s because it’s what happens AFTER profit and behind those numbers that really matters.
Profit (or Loss) is only the start of what you need to know about your numbers so here’s where to start!
1. Ask yourself what are you working for? We call it Lifestyle Number.
Lifestyle Number is the total amount of income you need every year (after tax) to pay for all the things in your life (including debt) and for small business owners, this comes from monies that you make from your small business through wages (or owners drawings) and profit.
So Lifestyle Number has a big responsibility in our lives and the progression of our aspirational Lifestyle Numbers.
The problem for so many small business owners, is that they do not know how much their Lifestyle Number costs each year and when they do calculate how much they need, they soon realise that the money they have is not enough to cover it. We call this the Lifestyle Number gap.
The good news is that most Lifestyle Number gaps are not too large and can be simply fixed so that you can keep making progress towards larger Lifestyle Numbers. There is nothing worse than realising your standing still or worse going backwards.
So get your numbers out and lets start seeing where you’re at.
2. Review your Profit & Loss Statement
Your Profit & Loss is a reflection of the year that was and your net profit should reflect how well you performed. For businesses that know their numbers, this figure is never a surprise.
However you withdraw money from your business (eg wage, drawings, or a mix of wage and profit), you need to calculate how much income your family received after tax. This number is most simply taken from your tax returns where you would use the total income reported, less the total tax withheld.
Alternatively, if you are paid wages via your business the number will be gathered from your payroll employee summaries or for drawings the number will be gathered from your owner drawing accounts.
(IMPORTANT NOTE: If you are taking drawings from your business, this income is BEFORE tax and therefore you should consult your Accountant or Advisor for further clarification on using this number for your Lifestyle Number).
Example Number: Gross salary $87,260 (Total Tax Withheld $21,684) = $65,576
3. Review your other income sources
Often a family has other income streams to support Lifestyle Number and this could include another wage earner (external to the business), rent or other investment activities.
For each that is applicable to you, you need to also calculate these numbers (after tax).
- Other wage earner = $________________ (calculate as per wage example above)
- Investment Property income = $_______________ (calculate rent less expenses – an average will suffice)
- Other Investment activities income = $_______________(calculate from monies paid into your bank account or seek assistance from your Accountant or Advisor)
- Also consider any credit limits you have access to = $__________________(calculate from bank statements)
4. Review your living expenses & debt
Do you know how much you’re family is spending? As we continue to move towards a cashless economy, it’s hard to stay on top of how much we are really spending. By taking the time to look over your bank statements you will gain a much clearer understanding – and like me, you will probably be surprised!
When reviewing your bank statements, you will also be able to calculate how much you are spending on your loan payments. If you need a template, download our Living Expenses calculator.
5. Don’t forget your Aspirational Lifestyle Numbers!
What are you working for? Take the time to consider these numbers and how much they cost as they will become the driving force behind every decision you make in your business in the year ahead.
So what is your Lifestyle Number Gap?
Add together your Money In numbers in items (2) and (3)
Subtract your Money Out numbers in item (4) and (5)
The difference is your Lifestyle Number Gap
The TOTAL Money Out is your Lifestyle Number.
Your income = $65,576 + other income $45,454 + Credit Card Limits = $116,030
Living expenses = $95,000 + loans $25,000 + Aspirational $15,000 = $135,000
Lifestyle Number Gap = ($18,970)