Why Spending as You Earn Can Hurt Your Business
- Silvia Merchant
- Apr 9
- 2 min read
Running your own business or freelancing can feel like a financial juggling act. You get paid, you pay some bills, take some for yourself, and figure the rest out later… right?
Wrong. That approach—spending money as it comes in—can seriously damage your business’s cash flow, stability, and even your peace of mind.
The better approach? Start with the end in mind. Decide how much you want to actually take home, and work backwards to figure out how much revenue you need to support that. This lets you stay in control of your finances and avoid nasty tax surprises.
What Happens When You Spend as You Earn?
When you're withdrawing funds as they hit your account, without making provisions for:
Corporation tax
VAT
Business overheads
…you risk overdrawing your business without even realising it. It might look like you’ve got cash, but in reality, much of it belongs to HMRC—or to future bills you haven’t accounted for yet.
The Smarter Way: Work Backwards From Your Net Income
Let’s say your goal is to take home £8,000 per month.
Rather than guessing, we’re going to reverse-engineer how much revenue you need to generate—before VAT—to achieve that comfortably, while covering:
25% Direct Costs (cost of delivering your service/product)
40% Overheads (software, rent, salaries, admin, etc.)
19% Corporation Tax (on your net profit)
Oh, and one more crucial thing: all figures below are VAT-exclusive. If you’re VAT registered, make sure you treat any VAT you collect as not your money—set it aside as soon as it hits your account.
💷 The Full Breakdown
To take home £8,000/month, you need to bring in around £28,217/month (VAT exclusive)
Category | Amount |
Revenue (Ex. VAT) | £28,217 |
Direct Costs (25%) | £7,054 |
Overheads (40%) | £11,287 |
Net Profit (before tax) | £9,876 |
Corporation Tax (19%) | £1,876 |
Net Income (take-home) | £8,000 |
⚠️ Don’t Forget About VAT!
If you're VAT registered and charging 20%, your invoice total would be:
£28,217 + 20% VAT = £33,860.40
That £5,643 VAT belongs to HMRC, not you. Set it aside as soon as it's received so you're not caught short when your VAT return is due.
The Benefits of Working Backwards
✅ You know exactly what to charge and how much you need to earn
✅ You avoid cash flow surprises
✅ You can confidently set business targets
✅ You stop spending money that isn’t truly “yours”
✅ You sleep better knowing your business is stable
Final Thoughts
Spending money as it comes in might feel easy in the moment—but it’s a fast track to stress, debt, and tax headaches. Flip the script.
Start by deciding what you want to earn, work backwards from that figure, and build your business revenue plan around it. With a clear income target and a smart financial model, you’ll run your business with confidence—not chaos.
Need help building your own net income plan? See what our clients have to say and let’s map it out together.
