The Reality Of A 7 figure Business
If you’re turning over £1 million a year as a business, then you’re in a pretty small club of successful businesses. High five you! You’re kind of a big deal.
Nobody can turn over that much money, for a sustained period of time, without offering a great product or service and keeping customers satisfied.
For a lot of people starting out, hell even after a good few years of being in business, the idea of turning over £83,333 every month seems impossible.
£2,740 every single day. How in the actual frig do you do that?!
Well, this blog is not going to answer that question for you! Sorry.
Instead, I’m going to look at what you get as the business owner when you have a business that runs at that level of turnover.
Err, What Do You Know?
Fair question, and one I’d always suggest asking of anyone who is talking about numbers. But I do have a bit of experience with this. I’ve mentioned before the influence my folks had on me growing up when it came to numbers and investing. One of the reasons they were vaguely interested in this kind of thing themselves was because they were running a successful marketing company at the time.
When they decided they wanted to take a step back from the company, it fell to me to run with it at that point.
Now I’d be lying if I said I was all that interested in running the company. That’s probably a blog for another day, but suffice to say that the company was turning over in the mid 7 figures. So I’ve got actual real-world experience with a company turning over £1m and more importantly of the numbers associated with it.
OK, But How Do I Actually Get There?
This seems like another blog for another day as well. But here are some of the ways you can mathematically get to a business turning over £1m per year.
Sales Per Year
Sales Per Month
So if you have a product that sells for £97 then you need to be selling 10,309 of them each year. Which equates to 859 each month.
It’s a lot eh?! Until you get up to the higher end price point, it’s an intimidating and daunting number.
An alternative is to go for the recurring revenue model, which looks a bit like this.
Price per month
Sales Per Year
New Customers Monthly
Slightly less terrifying, but still quite the number. Now the sensible answer is to do a combination of all these things. Sell a few higher-priced one-off products and a few recurring revenue products. But I’ll let you figure that out for yourself.
What Do The Numbers Look Like?
If you’re turning over £1m each year, then in the UK you’ll almost definitely be paying VAT on your sales. Now if you sell mostly to companies, you can charge £1m excluding VAT, but if you’re selling to individuals then chances are it’s £1m including VAT.
So straight away you’re going to lose 20% in revenue to the taxman. Booooooo.
From a profitability perspective, the average profit margins in the UK are somewhere between 12 and 18%, depending on what sector you’re in.
But you’re great. So let’s assume you are running at 20% net profit. Which when you work it out, starts to give you numbers like this.
Less Cost of Sale
Less Operating Expenses
Rent, Marketing, Staff, etc.
Corporation Tax Due
Net Profit After Tax
These figures are entirely made up, but it doesn’t really matter. What matters is you turnover £1 million and you make a 20% profit, or £200,000. You then pay some tax on that, at 19% and end up with £162,000 for the company.
But stuff the company, this is all about you. You’re not going to leave anything for the company - screw it. So you want to take the rest of the money out for yourself. All £162,000 of it! (Some people may take a salary out as well to take advantage of the £12,500 tax-free allowance, but at this level of income, you don’t get it anyway, so no point unless you want to pay NI).
That’s gonna look a little something like this…
Total Take Home Pay
Effective tax rate
Now if you are working 7 hours a day, 5 days a week, then your effective hourly rate is £69.20.
If you’re more of a hands-off CEO then you may get away with only working 3 hours a day, 5 days a week. In which case your hourly rate goes up to £161.46.
Cool, Interesting Even, But So What?
Honestly, no reason really. Just to illustrate that a turnover of £1,000,000 can reasonably and realistically turn into an income that is more achievable for a lot more people than you might think.
So aiming for that £1m business if it involves racking up 80% worth of costs to achieve, might not be that much more worthwhile than going for a turnover of £250,000 but keeping your costs to a minimum.
A lot of people can hit a point where they can stay a solo-preneur, or if they want to take the step up and create a full-blown team behind them with all the costs that go with that.
There’s no right or wrong answer. And I think a lot of people always assume that growing and increasing turnover is the best thing.
What’s the Alternative?
Take someone turning over just under the VAT threshold as a sole trader. Turnover is £85,000 (or £84,999 to keep them happy), and let’s say you spend £10,000 on some assistants time and some random software products, etc.
When it’s all done and dusted, you’d end up with £4,337 per month net of all taxes.
So as a one-man band, with nobody else to employ or overheads to worry about, you are earning 41.3% of someone turning over £1m and taking dividends of £100k more than you each year.
Run two separate businesses that are both under the VAT threshold and you’re on 82.6% of the take-home pay as someone who has to deal with tax offices and staff and rent and VAT.
I’m all about scale and growth, but not at the expense of time. This blog was inspired by someone coming to me desperate to scale to £1m because they wanted to be rich and have a take-home salary of £80k a month.
After we’d run the numbers, they a) didn’t like me that much anymore, and b) went away to consider if everything involved in hitting that annual target was really worthwhile.
Do what you want, but never forget to run through the numbers of your goal to make sure it’s worth it.