4 smart ways to manage money as a sole trader

If you’re operating as a sole trader, it doesn’t matter what sector you specialise in, managing your money well is a crucial part to your success. Our business guide for sole traders looks at some simple actions you can take and some suggestions for improving the performance of your small business.

When you’re self-employed or working as a contract freelancer, your income is rarely regular and usually arrives in lump sums, followed by periods of inactivity.

Sole traders who don’t maintain a watchful eye on their spending, may find themselves in a feast-or-famine position, where they go from spending a lot after receiving a huge sum to quickly overflowing their credit while waiting for the next payout.

So, how can you manage your cash flow while expanding your business and wealth and lowering your tax liability? Here’s a few tips how.

1. Recognise your current financial status

Believe it or not many small business owners are unaware of their net position throughout the year. Keeping a good set of books and accounts that accurately reflect your assets and liabilities, especially as May and June approach each year is one thing you can easily do throughout the year to stay on top of your finance game.

This puts you in charge and may allow you to apply some financial strategies like using salary or dividends, superannuation contributions, bringing forward or deferring income, acquiring or deferring equipment or shares with the advice of your accountant to maximise your after-tax position.

2. Make sure you pay yourself

From the beginning, make it a habit to pay yourself a minimal wage. This may be monthly or fortnightly and it doesn’t have to be a lot at the start, but it should be enough to cover your essential living expenditures.

Getting into the habit of having a regular stream of income is something which will provide not only stability to yourself and your business but your household too.

3. Do not set aside funds that you may require in the near future

Because a mortgage is deemed ‘bad debt,’ or debt that is not tax-deductible (ie. when not for an investment property), many people want to pay it off as quickly as possible. While you may be motivated to do this, there are some other approaches you may want to look into.

Something to consider is, rather than making additional capital payments, but every spare dollar into an offset account against your home or business debt. This has the same effect as making capital repayments and decreasing your interest bill, but instead of requiring you to redraw or use costly overdraft capabilities, it provides you with quick access to cash.

4. Earn money from sources other than your sole proprietorship

Yes, the old adage about not putting all your eggs in one basket still holds true today, particularly given how quickly economies, markets, and trends shift.

While you may adore what you do and believe it will set you up with a healthy source of income, it is always a good idea to have a Plan B. For example, contributing to superannuation regularly is a smart way to save money in a structure that is appropriately protected in the event of bankruptcy. If you wish to ultimately own your business premises in your own Self-Managed Super Fund (SMSF), you could make this a part of your long-term business strategy .

Making an erratic cash flow appear steadier, ensuring that your firm is not overexposed to the detriment of your family wealth, and finally protecting that wealth from business risks are all aspects of managing your money as a single trader.

Being a sole trader, protecting your back pocket is always a priority, and that’s why it is important to consider your business insurance options to help you stay in the business game for the long term. BizCover offers a range of business insurance solutions designed to provide protection against a variety of different risks, giving you peace of mind and insurance with no-dramas. Find out more today.

*This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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