Your Limited company accounts are lying to you.

And, it’s my fault.

As an accountant, it’s my job to ensure our clients get the most amount of money from their Limited company’s into their personal bank accounts.

Essentially by paying less tax.

Therefore we advise the director / owner of the company to pay themselves via a small salary, about £12,500 and to take the rest as dividends.

The problem here is that the accounts never show a true profit before tax.

Only the £12,500 salary is shown as an expense.

The dividends are taken from after tax profits.

It looks like this:

Profit before tax £50,000

Tax (£9,500)

Dividends (£40,000)

Profit remaining £500

On paper this company makes £50,000 in profit, but that is false!

This director is only taking £40,000 in dividends because that’s all that’s left!

What if the director is working 60 hour weeks and in reality if he were to do this as an employed role he would be earning £75,000 p.a.

To show the true the profit we need to adjust for £62,500 (£75,000 - £12,500).

The true position is that this company is actually loss making by £12,500!!

I teach this concept with visual examples in module 3 of my up coming course; Mastering Company Finances.

Action point:

Calculate your adjusted ‘TRUE’ profit.

1. Calculate what it would cost in a commercial salary to replace you e.g. £60,000 p.a.
2. Calculate the difference between the commercial salary and your actual PAYE salary that shows as a P&L expense.
3. Take the Net profit per your accounts (either last published accounts or current from your accounting system).
4. Adjust your Net Profit from step (3) by the value calculated in step (2)

Result - you now have your adjusted ‘Real’ Net profit.

Hopefully is shows a positive number.

Note: This is how any potential purchaser would view your business - because they need to replace you, they have to put a true cost on you!

To your financial success!

Karl