Your company accounts, the story of your business - Part 2 - Overheads and net profit

  • by Carole Jordan
  • 23 Oct, 2017
your company accounts overheads and net profit business accoutants brighton businessheads

This is a series of blogs to help you understand and analyse your business by understanding your accounts better. This week we're talking overheads and what your net profit figure means.

To start from the beginning, check out my last blog where I ran through the profit and loss report, finishing up with gross profit! Gross Profit is essentially the amalgamation of the contribution of each sale. It's key to your success as it must cover your Overheads and leave some Net Profit for you as a shareholder and some surplus for investment in the business as you grow.

Overheads, or indirect costs

These are the costs that your business incurs regardless of the value of your sales. 

 If you made no sales tomorrow what costs would you still incur? These include;

  • Your rent and other premises costs
  • Overhead staff costs (those people who are not part of the delivery of your sales)
  • Marketing expenditure 
  • Travel which is unrelated to delivering sales. 
  • You will also have professional and legal costs 
  • Items such as bank charges and possibly, interest. 
  • To some degree, you will recognise the ageing of the equipment in your business by accounting for depreciation.

Although these costs are not part of your deliverable to your customer they reflect the infrastructure you have built to satisfy your customers and sustain your business into the future. They tend to grow as you increase your level of sales and they can often come in steps. Hence, sometimes they are referred to as Step Costs. For example, you are likely to need more space as the business grows and moving from one premises to another will represent a jump in your overheads.

Whenever you incur step costs it ups the ante on maintaining and increasing sales to generate the Gross Profit to cover those additional overheads. Decisions around growing overheads in anticipation of a growth in sales must be taken very carefully. This is a time when preparing a new financial forecast is essential.

Keeping your overheads down is key in maximising your net profit and is often the area where most business owners focus. Many small businesses have very low overheads as they are able to operate with lower equipment and staff costs which is excellent, however, inevitably costs will rise. 

Budgets should be set at the beginning of the year and actual costs tracked against them. This is easy to do with modern accounting software. Price levels for overheads should be reviewed regularly and any new expenditure justified since every £1 spent should be an investment in the future of the business. 

We’ll come back to budgets later. For the time being, be sure you know what your overheads are; make sure they are not higher than necessary, and that you're getting value from that expenditure.

All the profit!!

After deduction of your cost of sales and overheads you are left with a profit. Most small business owners take their living costs from the profitability figure of the business and so this is a crucial figure. In addition, for any growing business there is the need for investment and so profit needs to be greater than the amount paid to shareholders. 

See more about what profit does for you in Part 3 - The Balance Sheet .

Continue reading this blog series...

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