cashflow forecasting for self-employment

quBluTraining

Hi, I have just started working self-employed... literally this wekk! Am sooo excited :-)

However, I'm confused as hell about how to compile my cashflow forecast effectively. I'm just not sure on how to order the forecast, as in is there a correct way of laying it out? Each time I change things around I get different results!... argghhhhh!

At the moment, I have my Gross Earnings at the top, then in order it goes (listed from top to bottom):
Running costs
Gross Profits (Earnings - Running costs)
Income Tax @ 20%
Class 2 NICs
Class 4 NICs
Personal Drawings
Net Profit

Is this correct? I have spoken to an accountant about this and she has seen my forecasts and said I had to put my Personal Allowances under where my tax/nic listings are, as I don't get taxed on personal allowances? But I read somewhere that I do!?... is that right, do I NOT pay ADDITIONAL income tax on any personal drawings/allowances?

Also, based on my current calculations and layout (as above), if I work into the equation of saving about 20% of my Gross Profit each month to cover my annual tax bill, by the end of the year, I am in debt! And a huge debt!!

I'm sooooo confused.... any help would be great. Thanks :-)

Ste_C

Personal drawings, tax and N.I have NO effect whatsoever on your profits.

You take your drawings and tax from your profit.

So if you have £50,000 of sales and £20,000 costs your profit is £30,000.

Of this £30,000 roughly 20% of it is tax. So the remaining £24,000 is yours to play with and do what you like with. Whether you leave it in the business or whether you withdraw it all (In big lumps throughout the year or using a standing order) your profit remains £30,000.

It does of course affect your cashflow. But cashflow and profit are too entirely separate things.

Pennywise

Gross profit = sales made in the period less costs of sales (direct costs).

Net profit = gross profit less runing costs.

You are taxed on net profit (adjusted for capital items among other things)

Drawings and tax come out of net profits.

Remember taxes are based on the accruals concept, not cash basis, so it is sales made in the period (paid or not), and expenses incurred (again paid or not). You also have to adjust for increases/decreases in stock over the period.

So basically, working out tax on cash flow is wrong anyway. It should be on profits on the accruals basis, which may or may not be quite different.

For a sole trader, tax and drawings don't appear on the profit & loss account at all.

Debt_Free_Chick

What your accountant means is that you deduct your Personal Allowance from your gross profit i.e. you don't pay tax on the first £6,305. However, if you've already earned salary this tax year, you will have had some of that allowance already. You might only have one month's worth of allowance left, so you might as well ignore it for this year.

But I assume you're forecasting now for next tax year? If so, then take gross profit and deduct £6,475 before you calculate your tax. Remember to add in higher rate tax if you go over £37,400 profit.

Out of your gross profit you need to deduct an amount for tax and NIC - it's best to actually put this away monthly in a savings account. What's leftover is net profit which you can draw off.

All you are trying to do is not spend all the money you make, before you've allowed for your tax & NIC.

As Pennywise says, this is not a thorough or accurate forecast up to accounting standards, but it should be good enough to ensure that you don't overspend and leave nothing to pay the taxman with!

I've used your definitions of gross and net profit, but be careful you don't get confused as the more usual definitions are as set out in Pennywise's post, above.