If you’re a sole trader, managing your money is critical to your success, regardless of your field of work. Here are some pointers on how to improve your performance.
When you’re self-employed or working as a freelancer on a contract basis, your income is rarely consistent and often comes in lump sums, followed by periods of dryness.
If you don’t keep track of your spending, it can be a feast-or-famine situation, as you go from spending a lot after receiving a large sum to fast overloading your credit while waiting for the next payment.
We’ve all met the bricklayer with the fantastic car who needs to borrow some bucks for lunch.
So, how can you manage your cash flow and reduce your tax liability while growing your business and wealth?
- Be aware of your finances
This may be self-evident, but many small business owners do not have a complete understanding of their net position throughout the year. Make sure you keep on top of your books and accounts to ensure that they adequately reflect your assets and liabilities, particularly as the months of May and June approaches each year.
This puts you in control and, with the help of your accountant, can help you to maximise your after-tax position by using salary or dividends, superannuation contributions, bringing forward or deferring income, purchasing or delaying equipment or shares.
- Take care of yourself as a priority
Make it a habit to pay yourself a basic wage weekly or fortnightly. It doesn’t have to be much at first, but you should make sure you are paying yourself enough to be able to meet your most basic living expenses.
Many people live off their savings when they first launch their own business. However, a better approach would be to lend the money from your savings and then pay yourself a baseline salary through the business.
This establishes a positive habit, which is especially important if you have a spouse, partner, or family who rely on you. While your family may be supportive of your efforts, a consistent cash flow will alleviate their fears. Maintaining regular payments to yourself also indicates you’ve established a key business indicator (KPI) within your company to at least cover that payment, which is often your first significant achievement.
- Make the most of what you have.
As a sole trader, you face a significantly larger risk of litigation than persons who work for a living. Don’t underestimate the issues that can arise if things don’t quite go according to plan. For this reason, you should fully research the sole trader insurance options that are available to you and ensure you have adequate coverage in place to cover any risks you may encounter.
If you do own assets, make every effort to reduce costs as much as possible, including the tax burden connected with the purchase and installation of major assets.
It’s for this reason that the Instant Asset Write-off, which has recently been increased to encompass assets valued up to $150,000, has been increasingly popular among Australian sole traders and small enterprises in recent years.
- Don’t spend money that you could need in the near future.
Many people attempt to pay off their mortgage as quickly as possible since it is considered ‘bad debt,’ or debt that is not tax deductible. This method is recommended, but with a twist.
Instead of paying additional capital repayments, every spare dollar should be put into an offset account against your home loan or company loan. This has the same purpose as making capital repayments and lowering your interest bill, but instead of needing to redraw or utilise costly overdraft facilities, it gives you easy access to a source of short-term money.
- Generate money outside of your business
Yes, the old adage about avoiding putting all your eggs in one basket still applies today, especially in light of how quickly economies, markets, and trends change.
While you may enjoy what you do and believe it will make you wealthy, having a Plan B is always a good idea. Regularly contributing to superannuation is a good approach to accumulating money in a framework that is adequately protected in the case of bankruptcy. Make this part of your long-term company plan if you want to eventually own your business property as part of your own Self-Managed Super Fund (SMSF).
If you’re investing in real estate on your own, make sure to take on as much debt as possible so that creditors have minimal access to your equity in the event of a lawsuit.
Making a sporadic cash flow appear more consistent, ensuring that you are not overexposed to your business to the cost of your family wealth, and lastly, preserving that wealth from business hazards are all part of managing your money as a sole trader.