The UK Tax and Accounting Podcast from I Hate Numbers:

There are Five key stages in your Business Financial Plan. Having a clear financial plan in place is essential for any small business, arts organisation, social enterprise, or SME. Creating one can seem like a daunting task. However, when broken down into the five key stages it becomes less of an overwhelm.

With my guidance, you'll ensure that all areas of your operations are considered and nothing important falls through the cracks.

Listen if you want to get ahead with your Business Financial Plan!

So listen to discover the five key stages that you need to go through to produce your business financial plan. Success, however you define it, is what we all want.  I guarantee if you don't have a financial plan in place then your will not progress as you want it to.  Furthermore, you're going to be stuck where you currently are right now, maybe making some small incremental changes.

If you really want to propel your business forward and achieve what it is that YOU want to achieve, then absolutely 100% put a financial plan together following these steps.  It will make all the difference in the world not just for yourself but also for your team around you as well.

Are you a small business owner, social enterprise or organisation passionate about change? Managing your finances can be a lot of work, trust me.  Finally, there’s software that makes keeping track of your cash flow and financial planning easier: Numbers Know How. It helps you stay organised so you can focus on what matters to you; the creative work and the impactful change. Take a step away from the chaos with fast setup & easy navigation – numbers just got real…for the better! Get organized & make sense of it all with Numbers Know How today!

Are you running a small business, social enterprise or arts organisation but aren’t sure if budgeting really matters? Well, it absolutely does! In this weeks I Hate Numbers podcast I discuss the importance of budgeting and show you why it should be an integral part of your plan for success.

Budgeting is essential for success and there are multiple reasons why. It promotes smarter decision making, helps track progress plus so much more.

Fasten your seat belts SMEs - here comes 8 solid reasons why effective budgeting should be top of mind for any serious business!

It’s amazing how many small businesses, SMEs, and arts organisations – you know the ones, that are always just teetering on the edge of making it big or going bust.  They either don’t bother with budgeting or do it all wrong.  I get it: budgets can be complicated and a chore to set up… but there's actually an incredibly simple reason why budgeting is so important for any business (yes, even yours!).  It doesn't have to be difficult; in fact, if done right budgets can propel your organisation into productivity overdrive! So why exactly should you budget? Listen to this podcast on The importance of Budgeting and I'll explain why.

The importance of budgeting can't be stressed enough. It doesn't matter whether you're a small business, arts organisation, social enterprise or all of the above combined. Budgeting is essential for any successful venture. If you've been avoiding this task like the plague (trust me, I understand why), it's time to finally confront your financial fears and start setting budgets!

Approach the (not so) dreaded B word Budgeting with the right attitude.

Thanks for listening.

Are you an SME, small business owner, individual artist or an organisation passionate about change? Managing your finances can be a lot of work, trust me.  Finally there's software that makes keeping track of your cash flow and financial planning easier: Numbers Know How. It helps you stay organised so you can focus on what matters to you; the creative work and the impactful change. Take a step away from the chaos with fast setup & easy navigation - numbers just got real...for the better! Get organized & make sense of it all with Numbers Know How today!

What should you charge for your services? It's a question that many small business owners, artists, and social enterprises grapple with.

Charging too much can mean you're shutting yourself off from potential clients, while charging too little can lead to you working for very little money.  Is it based on how much experience you have, how long it will take you to do the job, or how big the project is?

How do you come up with a price that accurately reflects the time and value of your work.  Moreover one that will not see you broke!

Whatever the answer, it is important to have an hourly rate in mind.  You may not bill by the hour but having a floor and ceiling limit is a wonderful guide.

In this weeks I Hate Numbers podcast I look at how to calculate an hourly rate for your time.

Listen to find out more

There is no one-size-fits-all answer to the question of how much you should charge for your time. However, by using the information provided in this podcast and in the FREE online pricing calculator, you can work out a fair rate for your services that will help power your business forward. Thanks for listening

Struggling with numbers and feeling like you can't win the battle between your ears?

I Hate Numbers is an easy, humorous but serious read about running a business. It also shows you how to have a financially rewarding relationship with your numbers. Furthermore, my book will help with that battle between the ears, that all business owners experience. If you feel like you could use some help in this area, buy my book and let me show you how to get on track for success.

Not only will you be able to understand your finances better, but you’ll also learn how to take the stress out of money management. Thanks for reading!

Click this ad right now and buy my book! You won't regret it!

Cost based pricing, also known as cost plus pricing, is one of the simplest ways to set a selling price. We start with what a product or service costs us, add a markup and arrive at the price we charge the customer.

Simple does not automatically mean best. Cost plus pricing is popular because it is straightforward and easy to understand, but it also has limitations. If we focus only on our costs, we can ignore what customers value, what competitors charge and whether those costs should be challenged in the first place.

In this episode, we look at how cost based pricing works, how fixed and percentage markups are calculated, what the markup needs to cover, and the advantages and disadvantages of using this approach.

Cost plus pricing has been used by manufacturers, retailers and other businesses for a long time.

The basic idea is easy to follow:

Cost + markup = selling price

However, the quality of the answer depends on the numbers we put into the calculation.

First, we need to understand what the product or service really costs. Then we need to decide what markup to add and what that markup is expected to achieve.

That is where cost based pricing becomes more interesting than simply adding a percentage to a number.

Before we calculate a selling price, we need to decide what we mean by cost.

For a manufacturer, that can include direct materials, direct labour and other costs that vary with production.

There are also overheads to consider. These might include factory rent, machinery costs, supervision, quality control and other resources needed to keep the operation running.

Together, these give us a fuller picture of what it actually costs to produce an item.

For a retailer, the starting point may be the cost of buying the stock that will eventually be sold.

The principle is the same. We need a sensible cost figure before adding anything on top.

If the cost number is wrong, the selling price built from it will also be unreliable.

One option is to add a fixed amount to the cost of each item.

In the episode, we start with the total profit we want to make and divide that by the expected number of units.

For example, if we want to make 100,000 of profit across 100 products, the required markup would be 1,000 per product.

That fixed markup is then added to the cost of each item to arrive at the selling price.

The basic calculation is:

Selling price = cost + fixed markup

Another common approach is to add a percentage to cost.

Suppose a product costs 5,000 and we decide on a 20% markup.

The markup is 1,000, giving us a selling price of 6,000.

Another way to calculate that is:

5,000 × 1.20 = 6,000

Businesses may also use different markup percentages across different product groups rather than applying one percentage to everything.

That can be important because products do not necessarily have the same costs, demand, customer value or profit potential.

The markup is not simply a reward added on top of cost.

It also needs to help support the wider business.

That can include delivery, IT, staff, sales, accounts, advertising, marketing and the amount you need to take from the business yourself.

So when we decide on a markup, the real question is whether the resulting selling price generates enough profit to support the business as a whole.

For a wider explanation of why that matters, see What Is Profit? Gross Profit and Net Profit Explained.

The biggest advantage is simplicity.

Cost plus pricing is easy to understand and relatively easy to calculate.

Most business owners can understand the idea of identifying a cost and adding something to it.

It also gives us a clear financial starting point. We know the selling price has been built from the underlying cost rather than chosen completely at random.

That simplicity helps explain why the method remains popular.

However, reliable does not necessarily mean it is the best pricing method for every situation.

One of the biggest weaknesses is that we may simply accept our existing cost base.

If last year's costs are inefficient and we add a markup to them this year, the selling price simply carries those inefficiencies forward.

That can make the business uncompetitive.

We should remain cost conscious. That does not mean slashing and burning. It means asking whether we can work more efficiently, improve productivity and remove costs that do not add value.

Customers are rarely interested in how much something cost us to make.

They are interested in whether it solves their problem, whether it is useful and whether it represents value for money.

That creates a weakness in cost based pricing because the calculation starts inside the business rather than with the customer or the market.

Our broader guide to Pricing Strategy: 6 Ways to Price Products and Services looks at how customer value, competitors and business objectives can influence the pricing method we choose.

Using the same percentage across every product can also be restrictive.

Some products may support a higher markup. Others may operate in more competitive markets.

A uniform percentage ignores those differences.

So even if cost plus pricing is our starting point, we should still look at demand, customer value and the market before settling on the final selling price.

Another challenge is deciding how much overhead belongs to each product or service.

Rent, staff, equipment, software and other shared business costs do not always fit neatly into one product.

If those costs are allocated poorly, the cost figure behind the pricing decision may be misleading.

Cost based pricing starts with the cost and works forward to the selling price.

There is another way to approach the same problem.

With target costing, we start with the price the market is prepared to accept and the profit we want to make. We then work backwards to find the cost the business can afford.

That makes the two methods useful contrasts.

Cost plus pricing asks:

What price do we need if this is what it costs us?

Target costing asks:

What can it afford to cost us if this is the price the market will accept?

This is an important distinction.

Markup compares profit with cost.

Margin compares profit with selling price.

So even though the two are connected, the percentages are not interchangeable.

The basic relationships are:

Markup percentage = profit ÷ cost × 100

Profit margin percentage = profit ÷ selling price × 100

If you want to explore the relationship further, see our guide to Gross Profit Explained.

You do not have to do all the number crunching manually.

Our free profit and discount calculator can help you explore pricing, profit and discount scenarios using your own numbers.

Use it alongside a clear understanding of your costs, the profit you need and the market you are selling into.

Cost based pricing starts with the cost of producing or providing a product or service and adds a markup to arrive at the selling price.

Yes. The terms are commonly used for the same basic approach: calculate the cost and then add an amount or percentage on top.

Multiply the cost by the markup percentage and add the result to the original cost. For example, a cost of 5,000 with a 20% markup produces a selling price of 6,000.

It is straightforward, familiar and easy to calculate. It also provides a clear financial starting point for setting a selling price.

It can encourage us to accept inefficient costs, ignore customer value and market conditions, and apply the same markup to products that may have very different profit opportunities.

Markup measures profit against cost. Margin measures profit against selling price. They describe the same profit from two different financial perspectives.

• 00:00 - What cost plus pricing means
• 01:44 - Understanding the cost behind the product
• 02:53 - Markup and the pricing calculator
• 03:14 - Calculating a fixed markup
• 04:24 - Using a percentage markup
• 06:42 - Problems with cost plus pricing
• 08:09 - Why the method remains popular
• 08:31 - The difference between markup and margin

• Pricing Strategy: 6 Ways to Price Products and Services
• How to Price Using Target Costing
• Gross Profit Explained

Cost based pricing is popular because it is simple.

Start with a reliable understanding of your costs. Then decide what markup you need and what that markup is expected to cover.

However, do not stop there.

Challenge your costs, understand what customers value and look at what is happening in the market. A price that works mathematically still needs to work commercially.

Most importantly, remember that markup and margin are different. Know which number you are using before making pricing and profit decisions.

Plan it, Do it, Profit.

If you want to test the numbers behind your pricing decisions, use our free profit and discount calculator.

If you need help understanding your pricing, costs, profit or wider business numbers, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

📘 Book

https://www.ihatenumbers.co.uk/i-hate-numbers-book/

🎧 Podcast

https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/

🌐 Website

https://www.ihatenumbers.co.uk

It's no secret that I know that financial planning is wonderful.  Successful businesses require effective financial planning. But did you know that there are several other benefits to financial planning as well? In this podcast I'll look at some of the key advantages of financial planning for your business.

Whether you're just starting out or you've been in business for a while, it's never too late to get started on sound financial planning!

The benefits of financial planning are vast, and they touch every aspect of your life.  This includes

• Firstly, clarity of purpose, decision making and focus, a clear path to success
• Secondly, reducing your stress and anxiety, why wouldn't you want that ?
• Thirdly, seeing where the risks and pitfalls.  Furthermore, managing and swerving those risks
• Lastly, avoiding a time consuming and expensive hobby, and making profits.

Being your own boss is a great feeling. But it's important to remember that, as with any other type of organisation, a business needs careful financial planning if it's going to be successful in the long term.

Listen to find out more

From reducing stress to making more money, financial planning is wonderful and essential for you and your business. Watch our video to learn more about how we can help you achieve your Northern Star. Are you ready to take the next step?So what are you waiting for? Listen to find out more.

Join my financial planning and story telling community at Numbers Know How If you want 1-2-1 support then I would be happy to help you create a sound financial plan for your company.

Are you ready to have an easier and more rewarding relationship with your numbers?  My book, I Hate Numbers helps you get there.

This book is based on my 27 + years in business, helping thousands of businesses survive and prosper.  Furthermore, it is an easy, humorous but serious read about running a business, having a financially rewarding relationship with your numbers, Furthermore, my book will help with that battle between the ears, that all business owners experience.

Get in touch with us to help make your life easier and stress-free. Contact us if you need help figuring out and sorting your numbers, creating your future financial story plans, your tax, payroll and other accounting and business matters.

Getting your Finances in Order is key to a successful business.  Find out more by checking out Numbers Know How 

So, if you’re someone who hates numbers I have five reasons Why you should ignore your numbers.

Firstly, if having no clarity or focus in your business sounds appealing to you then by all means continue to avoid looking at your numbers.

Secondly, if making decisions on the fly without any real understanding of what is happening works for you then keep doing what you’re doing.

Thirdly, if experiencing stress and anxiety is how you like to roll then go ahead and stay blissfully ignorant of your numbers.

Fourthly, if feeling like you’re in control and knowing what is happening with your business puts too much pressure on you then don’t worry about it!

Lastly, if having a time consuming hobby that doesn’t make any profits is more up your alley than actually making money then ignore away.

.Although it may be tempting to ignore your numbers, there are many reasons why you should not. The most important reason is that by understanding and paying attention to your numbers, you put yourself in the driver’s seat of your business and can make better decisions based on data rather than guesswork. If this sounds like something you would prefer to avoid, then I suggest subscribing to my I Hate Numbers You Tube channel where I will continue providing helpful tips and information about all things related to numbers (and how to ignore them).

Good to know

Are you ready to have an easier and more rewarding relationship with your numbers?  My book, I Hate Numbers helps you get there.

This book is based on my 27 + years in business, helping thousands of businesses survive and prosper.  Furthermore, it is an easy, humorous but serious read about running a business, having a financially rewarding relationship with your numbers, Furthermore, my book will help with that battle between the ears, that all business owners experience.

Get in touch with us to help make your life easier and stress-free. Contact us if you need help figuring out and sorting your numbers, creating your future financial story plans, your tax, payroll and other accounting and business matters.

Getting your Finances in Order is key to a successful business.  Find out more by checking out Numbers Know How 

Assets and liabilities are two of those accounting terms that sound more complicated than they need to be.

However, understanding them gives us a much clearer picture of what a business owns or controls, what it owes and the resources available to help it generate value.

That matters whether you are an owner, partner or part of a management team making decisions.

So in this episode, we strip away the jargon and use a restaurant to explain the difference between assets and liabilities, the main categories they fall into and why knowing the distinction is useful.

Business jargon is difficult to avoid.

Assets and liabilities are two particularly important pieces of that jargon because they help us understand the financial position of a business.

In this episode, we look at:

• what makes something an asset
• what a liability means in accounting
• fixed assets and current assets
• debtors and accounts receivable
• current and long-term liabilities
• tangible and intangible assets
• why the balance between assets and liabilities matters

Most importantly, we translate those terms into examples we can actually recognise inside a real business.

For the practical explanation in this episode, an asset has three important characteristics.

First, it is a resource that the business owns or controls.

Second, we expect that resource to provide some form of benefit to the business.

Third, we need to be able to put a value against that resource.

Examples might include:

• cash in the bank
• equipment
• vehicles
• stock or ingredients
• money customers owe us
• property
• machinery

The exact assets will depend heavily on the type of business.

Imagine a restaurant preparing to serve customers.

Before it can sell a meal, it needs resources.

For example, the kitchen might contain:

• ovens
• cookers
• microwaves
• other kitchen equipment

Those resources allow the restaurant to prepare food and provide the dining experience.

It will also need ingredients.

The ingredients are bought, transformed into meals and then sold to customers.

Both the kitchen equipment and the ingredients are assets, but they behave differently inside the business.

That is why accountants divide assets into categories.

Fixed assets are resources we normally expect the business to keep and use over a longer period.

They help the business operate and generate value rather than being bought specifically to turn quickly into cash.

For our restaurant, that could include:

• ovens
• cookers
• kitchen equipment
• furniture
• property used by the business

A motor dealership might have a showroom, reception equipment and other fixtures.

A manufacturer may have substantial machinery and production equipment.

Meanwhile, transport and telecommunications businesses may depend on relatively large amounts of fixed assets.

The important idea is not that a fixed asset is literally fixed to the floor. It is that the business expects to retain and use it to support its activities.

Current assets have a different role.

They are typically resources that move through the normal operating cycle of the business and may eventually turn into cash.

In the restaurant example, ingredients are current assets.

The restaurant buys them, turns them into meals and sells those meals to customers.

Cash itself is also a current asset.

Another common example is money owed by customers.

Suppose the restaurant provides outside catering to a commercial customer and allows them 30 days to pay.

The work has been done, but the cash has not arrived yet.

That amount owed by the customer is an asset.

So you may hear that customer balance described as a debtor or accounts receivable.

Different wording, same underlying idea: somebody owes money to the business.

Now let us look at the other side.

A liability represents money or an obligation the business owes to somebody else.

Common examples include:

• business loans
• bank overdrafts
• hire purchase agreements
• finance arrangements
• amounts owed to suppliers
• unpaid wages
• other unpaid business costs

Just as we divide assets into useful categories, liabilities are also grouped according to when they are expected to be paid.

Current liabilities are amounts the business expects to settle in the shorter term, typically within the next 12 months.

For example, suppose a supplier gives you 30 or 60 days to pay for goods or services.

Until you pay the supplier, that amount is a current liability.

Other examples can include:

• supplier balances
• bank overdrafts
• unpaid wages
• short-term amounts due under borrowing arrangements
• other bills that need settling within the next year

These amounts matter because the business needs enough cash and resources available to meet them when they fall due.

Long-term liabilities are amounts due beyond the shorter 12-month period.

That might include longer-term:

• loans
• mortgages
• hire purchase arrangements
• other finance agreements

However, one borrowing arrangement can contain both current and long-term amounts.

Take a mortgage as an example.

The mortgage itself might run for 25 years.

Amounts due in the coming 12 months belong to the shorter-term portion, while amounts repayable later belong to the long-term portion.

This helps us understand not only how much debt exists but when the business needs to pay it.

This is an important distinction.

Suppose the business buys a property using a mortgage.

The property is an asset.

The mortgage is a liability.

They are connected because the borrowing helped finance the purchase, but they are not the same thing.

The same principle may apply when a business buys machinery, equipment or vehicles using finance.

Understanding the difference helps make financial statements much easier to interpret.

For a wider guide to reading those reports, see our explanation of understanding your financial statements.

Assets are not always things we can physically pick up.

Some assets are tangible.

That means they have a physical form.

Examples include:

• vehicles
• computers
• machinery
• equipment
• property

Other assets can be intangible.

These do not have the same physical form but may still represent value to the business.

The episode gives examples such as:

• goodwill
• copyright
• trademarks
• patents
• intellectual property

So when we think about business assets, we should not only look around the office or workshop for physical objects.

CategoryWhat it meansExamples from the episode

Fixed assets

Resources retained and used by the business

Ovens, kitchen equipment, property, machinery

Current assets

Resources that move through the operating cycle or can turn into cash

Ingredients, cash, debtors

Current liabilities

Amounts generally due within the next 12 months

Supplier balances, overdrafts, unpaid wages

Long-term liabilities

Amounts due beyond the shorter-term period

Longer-term loans and mortgage balances

Tangible assets

Assets with physical form

Vehicles, computers, machinery

Intangible assets

Non-physical assets

Goodwill, trademarks, patents, intellectual property

Understanding these categories helps us see the financial health and structure of the business more clearly.

Think of a seesaw.

On one side are the resources and value represented by your assets.

On the other side are the amounts you owe.

The point is not that every business should avoid debt completely.

Instead, knowing what we own or control, what we owe and when those obligations fall due gives us a clearer financial picture.

It can help with:

• understanding financial position
• planning future spending
• managing debt
• monitoring cash requirements
• making better business decisions
• reading financial statements with more confidence

If accounting terminology often gets in the way, our guide to understanding financial terminology is a useful companion.

A useful exercise is to identify the assets and liabilities you already have.

Start with assets.

What resources does the business control?

Which are fixed assets?

Which are current assets?

Then look at liabilities.

Who does the business owe money to?

What needs paying in the next 12 months?

What borrowing continues beyond that?

Doing this turns accounting vocabulary into something much more practical because you begin connecting the terminology with your own business.

Assets are resources owned or controlled by the business that can provide value or benefit. Liabilities are amounts or obligations the business owes to other parties.

Fixed assets are generally retained and used by the business over a longer period. Current assets move through the normal business cycle and may turn into cash, such as stock, customer debts and cash itself.

Yes. Where a customer owes the business money for work already completed or goods already supplied, that amount is normally treated as a current asset. You may also hear it called a debtor or accounts receivable.

A current liability is an amount the business expects to settle in the shorter term, generally within the next 12 months. Examples include supplier balances, overdrafts and other short-term amounts due.

Yes. The amounts due within the coming 12 months can form the current portion, while the remaining balance due later can sit within long-term liabilities.

No. Tangible assets have physical form, such as machinery or vehicles. Intangible assets can include goodwill, trademarks, patents and other intellectual property.

They help you understand what resources the business has, what it owes and the overall financial position. That information supports better planning and decision making.

• 00:00 - Why assets and liabilities matter
• 01:22 - Three characteristics of an asset
• 02:05 - What liabilities mean
• 02:26 - Restaurant example
• 03:31 - Fixed assets explained
• 04:27 - Current assets and cash
• 04:54 - Debtors and accounts receivable
• 05:10 - Fixed and current asset categories
• 05:53 - How assets differ between industries
• 06:10 - Liabilities and business debt
• 06:48 - Long-term liabilities
• 07:36 - Current liabilities
• 08:19 - Splitting a mortgage between current and long-term debt
• 09:01 - Tangible assets
• 09:19 - Intangible assets
• 09:47 - Why the balance between assets and liabilities matters
• 10:27 - Identifying assets and liabilities in your own business

• Understanding Your Financial Statements
• Understanding Financial Terminology
• Why Financial Accountability Matters in Business
• Understanding Cash Profits

Assets and liabilities tell us two different parts of the financial story.

Assets represent resources the business owns or controls and uses to generate value.

Liabilities represent amounts the business owes.

From there, we can divide assets into fixed and current categories, separate physical and non-physical assets, and split liabilities according to when they need to be paid.

Once you understand those basic buckets, financial statements become much less intimidating.

So have a look around your own business.

What are your assets? What are your liabilities? And what does that tell you about the financial position you are in?

If you need help understanding your accounts, organising your bookkeeping or getting clearer information from your numbers, you can contact us for an initial chat.

You can also explore our free online business calculators for practical financial support.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

📘 Book

https://www.ihatenumbers.co.uk/i-hate-numbers-book/

🎧 Podcast

https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/

🌐 Website

https://www.ihatenumbers.co.uk

Gross profit explained simply: it is the money left from sales after you take away direct costs or cost of sales. Sales alone do not show whether your business is healthy. Instead, gross profit helps you understand pricing, costs, margins and whether each product or service gives the business enough money to cover overheads and move towards real profit. In this episode, we explain what gross profit means, how to calculate it, and why markup and margin are not the same thing.

Profit needs to be one of the destination points on your business journey. When the journey focuses only on sales, the route can quickly become dangerous.

This episode focuses on gross profit. It explains what gross profit is, how to calculate it, how it differs from sales, and why it matters when planning prices, costs and business decisions.

We also look at markup and margin. Business owners often mix these two terms together, but they do different jobs. Markup helps you arrive at a selling price, while margin helps you understand how much profit sales generate.

Gross profit is one of the most useful numbers in your business toolkit.

It shows the difference between what you sell and the direct costs linked to making those sales. Those direct costs may include materials, stock, production costs, direct labour or other costs that relate closely to the product or service sold.

Sales, turnover and revenue can all sound impressive. However, they do not show the full story. A business can have good sales and still struggle when gross profit is too low.

For the wider profit foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Gross profit is the difference between sales and the direct costs of making those sales.

Accountants often call those direct costs cost of sales or cost of goods sold. The exact wording depends on the type of business, but the idea stays the same: what did it cost to create or provide the thing sold?

For example, an artist may sell a piece of work but also need canvases, materials and other direct supplies to create it. The difference between the selling price and those direct costs gives the gross profit.

The basic calculation is simple:

Sales minus direct costs equals gross profit.

In the episode, the example uses an artist selling five pieces of work for £40 each. That creates £200 of sales.

Each piece costs £20 in materials and direct costs, so five pieces cost £100 in total. The gross profit is therefore £200 of sales minus £100 of direct costs, which leaves £100 of gross profit.

That £100 is not the final profit. The business may still need to pay rent, admin, marketing, software, insurance and other running costs. After those operating costs, the next profit measure is operating profit.

For the related episode, see Explaining operating profit.

Gross profit applies across many types of business, but direct costs can look different.

• Retail business: the difference between the cost of buying stock and the selling price.
• Food business: the difference between the cost of ingredients and the selling price of the meal or product.
• Training business: the difference between fees charged and direct costs such as room hire, materials, handouts or booklets.
• Manufacturing business: the difference between the selling price of products and the cost of making those products.
• Creative business: the difference between the selling price and the direct materials or production costs needed to create the work.

The key point is that gross profit is not just an accounting term. It shows whether the core activity of the business creates enough value.

Markup and margin are related, but they are not the same.

Markup starts with cost. You take the direct cost, add a profit element, and arrive at a selling price.

Margin starts with the selling price. It looks at the profit element as a percentage of the sales price.

This difference matters because markups can be higher than 100%, but margins cannot exceed 100%. Also, margins are always lower than the equivalent markup percentage.

Using the artist example, one piece of work costs £20 to make.

The artist adds a 100% markup, which adds another £20 to the cost. That gives a selling price of £40.

Markup works well as a simple way to set a price from cost.

Using the same example, the selling price is £40 and the gross profit is £20.

To calculate the gross margin, divide the gross profit by the selling price. In this case, £20 divided by £40 gives a 50% gross margin.

When five pieces are sold, total sales are £200 and total gross profit is £100. The gross margin still comes to 50%.

Gross margin helps you estimate how much gross profit the business should create from a given level of sales.

When you know your turnover and gross margin percentage, you can estimate the gross profit available to cover overheads and support profit planning.

As a result, margin becomes especially useful for forecasting, pricing, product decisions and deciding which products or services deserve more focus.

For a deeper look at gross profit as a business decision tool, see Why Gross Profit Matters for Business Decisions and Cash Flow.

The episode also highlights an important point about VAT and sales tax.

When you work out markup, margin and gross profit, make the calculations before sales taxes. If you are VAT registered, the VAT collected from customers does not belong to the business as profit. You collect it on behalf of the government.

Therefore, you should normally exclude VAT when calculating profit margins. This keeps the margin calculation focused on the business’s own sales and direct costs.

Gross profit helps business owners ask better questions.

• Are prices high enough?
• Are direct costs rising?
• Is the product or service mix working?
• Which products generate stronger margins?
• Which services need to be reviewed?
• Is there enough gross profit to cover overheads?
• Does the business have enough margin to support growth?

These questions move the conversation beyond sales. They help you understand whether the business is building a strong enough pool of profit to support its running costs and future plans.

Gross profit also connects closely with break-even.

Break-even shows the level of sales needed to cover costs before profit begins. Meanwhile, gross profit shows how much each sale contributes towards those costs.

Weak gross margins mean the business may need much higher sales to break even. Stronger margins mean each sale contributes more towards overheads and future profit.

For the next step in this journey, see Break-Even Point Explained: The Business Milestone Before Profit.

Gross profit is sales minus direct costs or cost of sales. It shows how much money remains after paying the costs directly linked to the products or services sold.

No. Sales, turnover or revenue show the value of what the business has sold. Gross profit shows what remains after direct costs come out of those sales.

Markup starts with cost and helps set a selling price. Margin starts with the selling price and shows profit as a percentage of sales.

Gross profit matters because it helps pay the running costs of the business. It also supports pricing, forecasting, product decisions and profit planning.

VAT should normally be excluded from margin calculations because VAT collected from customers is not business profit. The margin should focus on sales value before VAT and the direct costs linked to those sales.

• 00:00 – Profit as a destination point in business
• 00:00 – What the episode covers: gross profit, markup and margin
• 01:57 – What gross profit means
• 02:41 – Artist example and direct costs
• 03:19 – Using the free online calculator
• 03:55 – Sales, turnover and revenue are not profit
• 04:35 – Calculating £100 gross profit from the example
• 05:07 – Gross profit examples across different business types
• 05:41 – Markup and margin introduced
• 06:14 – Markup example using cost and selling price
• 06:59 – Margin example using gross profit and sales price
• 07:38 – Why markup and margin are both used
• 08:15 – Why margin is powerful for planning and decisions
• 08:57 – Why margins cannot exceed 100%
• 09:41 – Gross profit as a powerful business metric
• 10:22 – VAT and sales tax in margin calculations
• 10:52 – Final summary and wrap-up

• What Is Profit? Gross Profit and Net Profit Explained
• Why Gross Profit Matters for Business Decisions and Cash Flow
• Break-Even Point Explained: The Business Milestone Before Profit

Understanding gross profit gives you more than a definition. It shows how much money your core products and services create before overheads come out.

Sales are not the same as profit. Markup is not the same as margin. Once those differences are clear, pricing, planning and decision-making become much stronger.

Plan it, Do it, Profit.

The I Hate Numbers podcast helps business owners understand profit, gross margin, pricing, costs, cash flow, tax and financial performance in a practical way. We simplify business finance so you can make better decisions and feel more confident with your numbers.

If you need help understanding gross profit, improving margins, reviewing prices or planning profit more clearly, you can contact us for an initial chat.

You can also use the free online business calculators to support your profit and pricing decisions.

You can watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

📘 Book

https://www.ihatenumbers.co.uk/i-hate-numbers-book/

🎧 Podcast

https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/

🌐 Website

https://www.ihatenumbers.co.uk

What is operating profit? It shows how much money your business makes from its core activities after you take away direct costs and operating expenses. Sales alone do not tell the full story. Instead, operating profit helps you understand how well the business performs before interest and tax enter the picture. In this episode, we explain what operating profit means, how to calculate it, why it matters, and how operating margin helps measure business performance.

Profit gives business owners one of the most useful ways to measure performance. However, the word profit can mean different things depending on which number appears in the accounts.

Here, the focus is operating profit. We look at what operating profit means, how the calculation works, and why it gives a clearer view of how well the core business performs.

You may also come across related terms such as net profit, EBIT and PBIT. These terms often appear in accounts, reports and business conversations, so understanding them helps you read your numbers with more confidence.

Operating profit helps you judge business performance before interest and tax enter the picture.

Sales can look strong, but they do not show whether the business runs efficiently. Operating profit shows what remains after the business covers the direct costs of sales and the operating expenses needed to keep going.

Because of this, operating profit supports budgeting, planning, management accounts and better decisions about how the business uses its resources.

For the wider profit foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Operating profit is the profit made from the main activities of the business.

The calculation starts with turnover, sales or revenue. Next, you take away direct costs, also known as cost of sales. After that, you deduct operating expenses such as rent, admin, marketing, bookkeeping, staff costs and other running costs.

That leaves operating profit. It shows the profit generated before interest and tax are added to the story.

Operating profit can appear under different names.

• Operating profit: the main term used in this episode.
• Net profit: a term sometimes used in a similar way, depending on context.
• EBIT: earnings before interest and tax.
• PBIT: profit before interest and tax.

These terms are closely linked, but reports and financial statements may use them differently. Therefore, always check which costs have already been deducted and which ones still sit outside the calculation.

The basic calculation is:

Turnover minus cost of sales minus operating expenses equals operating profit.

In plain English, start with what the business sells. Then take away the direct costs needed to make those sales. Finally, take away the operating costs needed to run the business.

That gives you the profit from core business operations.

The episode uses an artist example to make the calculation easier to follow.

Imagine an artist sells works of art during the year and makes £60,000 in turnover.

The artist spends £20,000 on direct costs such as paints and canvases. That leaves £40,000 of gross profit.

On top of that, the artist spends £20,000 on operating expenses such as studio rent, admin support, marketing and bookkeeping.

So the operating profit is £40,000 gross profit minus £20,000 operating expenses. That leaves £20,000 operating profit.

This also shows how operating profit differs from gross profit. For more on that earlier layer of profit, see Gross Profit Explained: How to Calculate Gross Profit, Margin and Markup.

The same idea applies to other business types.

For example, a restaurant may generate £100,000 in sales. It may spend £40,000 on food and other direct purchases. That leaves £60,000 of gross profit.

If the restaurant then spends £20,000 on operating costs such as rent, marketing and staff wages, the operating profit is £40,000.

The shape of the business may change, but the principle stays the same. Operating profit shows how much profit remains after direct costs and operating expenses come out.

Operating profit works well as a benchmark because it focuses on the core business.

It helps show how efficiently the business is managed. It also helps you review how well resources are being used, how tightly operating costs are controlled and whether the business model is strong enough.

If turnover rises and operating costs stay broadly the same, operating profit should improve. However, if turnover falls while operating costs stay in place, operating profit can drop quickly.

That makes operating profit useful for planning, forecasting and stress-testing business performance.

You can also show operating profit as a percentage. This is called operating margin.

Operating margin compares operating profit with turnover. It helps you understand how much operating profit comes from each pound of sales.

In the artist example, turnover is £60,000 and operating profit is £20,000. When you divide £20,000 by £60,000, the operating margin comes to around 33%.

Both the money figure and the percentage are useful. The money figure shows how much operating profit the business has made. Meanwhile, the percentage helps you compare performance over time or across different parts of the business.

For a related performance-measurement episode, see Using Financial Ratios in Business.

Operating profit helps business owners ask better questions.

• Are sales high enough to support the business?
• Are direct costs under control?
• Are operating expenses too high?
• Is the business becoming more or less efficient?
• How much profit comes from core trading activity?
• What happens if turnover drops?
• Can the business afford to invest, grow or take on more costs?

These questions move business decisions away from guesswork and towards clearer financial understanding.

Operating profit also helps when you read financial statements.

It usually sits below gross profit and above interest and tax. That position matters because it shows the profit made from business operations before financing costs and tax come in.

As a result, operating profit makes it easier to judge whether the business itself is performing well, separate from how it is financed or taxed.

For help with the wider picture, see Understanding Your Financial Statements.

Operating profit is the profit made from the core activities of a business after direct costs and operating expenses come out, but before interest and tax are included.

You calculate operating profit by taking turnover, subtracting cost of sales or direct costs, and then subtracting operating expenses.

No. Gross profit is sales minus direct costs. Operating profit goes one step further because it also takes away operating expenses such as rent, admin, marketing and other running costs.

Operating profit is closely linked to EBIT, which means earnings before interest and tax. In many business contexts, people use them in a similar way, but you should always check what the calculation includes.

Operating profit matters because it shows how well the core business performs. It also supports budgeting, planning, cost control, forecasting and better decision-making.

• 00:00 – Profit as a business performance measure
• 00:00 – What the episode covers: operating profit, calculation and importance
• 01:32 – Operating profit, net profit, EBIT and PBIT
• 02:15 – How operating profit is calculated
• 02:46 – Artist example introduced
• 03:21 – £60,000 turnover, direct costs and operating expenses
• 04:06 – Restaurant example and why operating profit is useful
• 04:51 – Turnover changes and operating profit movement
• 05:38 – Operating margin percentage explained
• 06:19 – Final wrap-up

• Gross Profit Explained: How to Calculate Gross Profit, Margin and Markup
• What Is Profit? Gross Profit and Net Profit Explained
• Understanding Your Financial Statements

Operating profit shows how much profit your business makes from its core activity after direct costs and operating expenses come out. It looks beyond sales and shows how efficiently the business operates.

Once you understand operating profit and operating margin, you can make better decisions about costs, pricing, budgeting, planning and future growth.

Plan it, Do it, Profit.

The I Hate Numbers podcast helps business owners understand profit, operating costs, gross margin, pricing, cash flow, tax and financial performance in a practical way. We simplify business finance so you can make better decisions and feel more confident with your numbers.

If you need help understanding operating profit, reviewing costs, improving margins or planning business performance more clearly, you can contact us for an initial chat.

You can also use the free online business calculators to support your profit and pricing decisions.

For more practical finance and tax support, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

📘 Book

https://www.ihatenumbers.co.uk/i-hate-numbers-book/

🎧 Podcast

https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/

🌐 Website

https://www.ihatenumbers.co.uk

Risk is a natural part of business life; using operational gearing measures one of those risks.  Sorry to throw in a bit of jargon there at the start, my jargon buster ray gun is there at the ready.

Have you ever wondered what operational gearing is? And how it can benefit your business? Maybe you have never heard of it.  Wonder no more, I look at operational gearing in this week’s podcast.  Firstly, I explain what operational gearing; secondly, how you measure it.  Finally, how you can use this knowledge to make your business stronger, with knowledge comes power.

Operational gearing is the level of fixed costs in a company as a proportion of total costs. It is a measure of how much a company has to spend to keep the business running, regardless of how much revenue it generates. The higher the level of fixed costs, the higher the operational gearing.

A high level of operational gearing can be risky for a company, because it means that a small decrease in revenue can result in a loss. However, it can also make a company more profitable because it can increase margins.

Understanding operational gearing is important for business owners and managers because it can help them to make informed decisions about where to allocate resources and how much debt to take on. It can also help them to understand the risks and rewards associated with different levels of operational gearing.

If your eyes are glazing at the thought of the number crunching, glaze not.  Use our FREE online calculator,

I whipped up to help you determine your own company's operational gearing. Give it a try!

Subscribe to my I Hate Numbers podcast where every week we discuss ways small businesses can survive and thrive,

Are you ready to have an easier and more rewarding relationship with your numbers?  My book, I Hate Numbers helps you get there.

This book is based on my 27 + years in business, helping thousands of businesses survive and prosper.  It is an easy, humorous but serious read about running a business, having a financially rewarding relationship with your numbers, Furthermore, my book will help with that battle  between the ears, that all business owners experience.

Get in touch with us to help make your life easier and stress-free. Contact us if you need help figuring out and sorting your numbers, creating your future financial story plans, your tax, payroll and other accounting and business matters