Can your business make enough money? How to check it

Sharon makes custom furniture. She wants to know how much money she needs to earn to cover her personal expenses. She uses these 8 steps to find out if she will earn enough with her business:

1. Personal: how much do you spend each month?
2. Annual sales: how much money will you sell for?
3. Purchasing: how much do your materials cost?
4. Operating costs: what costs do you incur for your business?
5. Income tax: how much tax do you pay?
6. Savings account: how much do you want to save?
7. Disability and pension: what do you arrange for this?
8. Income: how much do you earn with your business?

Please note: the amounts in this calculation do not include VAT. 

1. Personal: how much do you spend each month?

You can only calculate how much money you need to earn with your business if you know how much you need. To do this, list what you spend each month on, for example, rent/mortgage, electricity, groceries, insurance and vacations. This is your private budget.

Example

Sharon calculates that she spends €2,600 monthly. She divides the expenses she pays together with her partner, such as rent and groceries, by two.

2. Annual sales: how much money will you sell for?

Your annual turnover is the sum of all the products you sell in a year. So you take the price of the product and multiply that by the number you expect to sell in a year.

Example

Sharon expects to sell €125,000 worth of furniture in a year. This is her turnover.

3. Purchasing: how much do your materials cost?

When you make a product, you need to buy materials. Or maybe you buy products from a wholesaler or supplier. Calculate how much money you will spend on purchasing.

Example

Before Sharon can get started, she needs materials. Think of wood, fabrics and nails and screws. This costs her €35,000 a year. She deducts this amount from her sales.

4. Operating costs: what costs do you incur for your business?

Running a business costs money. The costs you incur for your business are called business expenses.

Example

Sharon rents a workshop. She also leases machines and a van. She takes out business insurance, such as corporate liability insurance. For her administration she hires an accountant and she spends money on advertising. Sharon's business expenses are €20,000 per year.
She also deducts this amount from sales. What remains is her profit: € 70,000.

5. Income tax: how much tax do you pay?

You file an income tax return once a year and pay tax on your profit.

Example

Sharon does not yet know exactly how much tax she will have to pay. To be sure, she calculates 30% of her profit. That is a generous estimate. She deducts the €21,000 income tax from her profit.

6. Savings account: how much do you want to save?

As an entrepreneur, you run more risk than as an employee. So it is smart to save money for when your business is not doing so well. You can also save money to invest in your business later.

Example

Sharon wants to save € 5,000 a year. That way she won't get into trouble if things go badly for her. She also wants to buy an expensive new machine in a few years. She also deducts this savings from her profit.

7. Disability and pension: what do you arrange for this?

Suppose you have an accident and cannot work for a while. As an entrepreneur, you are not automatically insured for this. And you also have to arrange your pension yourself.

Example

Sharon takes out disability insurance (AOV). This way she knows for sure that money will come in if she gets sick or has an accident. She also wants to save for her pension, so that after her retirement age she will have more money than just AOW. This will cost her €8,000 a year. She also deducts this amount from her profit.

8. Income: how much do you earn with your business?

Once you have deducted all costs from steps 3 to 7 from your turnover (step 2) you can see how much you can earn in a year with your business. Is it better or worse?

What if it is not enough?

Complete this calculation in several ways. What if your expenses are higher? Or if you make less revenue than you hoped? Will you still have enough left over? If not, maybe you can think of ways to make additional sales. Or lower your costs.

Example

Sharon's annual income is €36,000. She divides this amount by twelve to calculate her monthly income: € 3,000. In step 1, she calculated that she spends € 2,600 per month privately. So her business makes enough money to live on.

Sharon makes another calculation. Here she assumes that she will have less turnover: € 115,000. Her expenses remain the same. In this situation, her monthly income is more than € 2,400, leaving her short by nearly € 200 per month. To solve this, Sharon looks at ways to reduce her costs. For example, she is finding out if there is a cheaper supplier. She can also try to save on her private expenses. Or find ways to increase her sales.

Calculation

In the table below you can see Sharon's calculation and, next to it, Jari's. He starts working as a self-employed coach. Jari sells a service and does not have to buy any materials. He also has no costs for business premises because his clients come to his home for coaching. That makes his operating costs a lot lower than Sharon's.

Please note that all amounts in this calculation are without VAT. Are you liable for VAT? Then you must charge VAT to your customers and pay it to the Tax Administration.