Sole traders either run their own business or work alone. Whether you have employees working for you or not, as a sole trader, you need to contend with the fact that you don’t have a fixed monthly income. Some months you’re likely to make more than others, especially if your products or services are seasonal in any way.
Despite having a fluctuating source of income, can you still make profits and thrive as a sole trader? You absolutely can, and here is how you do it.
Money management for tradies
Sole traders need to monitor their cash flow carefully and maintain their books and accounts. You’ll also need to take into consideration any tax obligations that you have. Sole traders are taxed as individual taxpayers. This means that you and your business are considered the same legal entity. When you file your tax return, you’ll also need to report any and all business-related income you’ve made.
There are various simple ways a sole trader could improve their financial position. Here are five practical money management tips for tradies:
1. Create a budget
Sole traders need to create a budget that outlines the general costs related to running their business. You’ll also need to take into consideration accounts associated with any business-related expenses you need to make in the future. An example of this would be utility bills or payroll. If you own a general store, for example, then this includes the money you need to spend to purchase your stock. The amount of money you have left after these expenses are your profit.
As a sole trader, the amount of money you make each month will vary. This is why it’s essential for you to understand what your breakeven point is. This is the amount of money you need each month to operate as a sole trader without worry.
2. Understand your financial position
Sole traders need to have a solid understanding of their net financial position through the year. In order to achieve this, you’ll need to have good bookkeeping and accounting skills. You can also consider hiring an accountant or setting up accounting software.
Books and accounts can provide you with valuable information about your cash flow. Consider creating a balance sheet, as well as a profit and loss statement. A balance sheet contains the complete list of your assets and liabilities within a set period of time. It’s an essential financial document that shows you your net financial position.
A profit and loss statement, on the other hand, shows you how much money is coming in and how that money is going out. This financial document can help you identify gaps between the profit that you need and the profit that you’re making. Depending on how much the hole is, you can then set financial goals to reach your target profit margin.
3. Pay yourself a wage.
Many sole traders, especially those who operate a small business, end up using their savings for their personal expenses. They use all the money they make through their work to grow and expand their business. This money is used to pay employees, purchase stock and inventory, purchase equipment for the industry, and more.
However, this tactic is not sustainable in the long run. This is as you may have personal expenses, a family to care for, and other needs. This is why you should consider paying yourself a wage, either on a weekly basis or every two weeks. The salary you pay yourself should be enough for you to cover all your personal expenses for that period of time.
This ensures that you don’t end up depleting your savings, and it also provides you with a set income that comes in on a regular basis.
4. Create an emergency fund
You never know when you may suddenly need money, and the last thing you want is to find yourself short. You may need to repair equipment, travel for work, or encounter some other business-related expense. When this happens, you should have some liquid capital available that you can delve into. An emergency fund serves this purpose.
An excellent way to create an emergency fund is to open a separate business bank account. There, start depositing a percentage of your earnings, say 5%, every month. This money is not meant to be touched unless in the event of an emergency. Another option is to create an offset account. This is especially helpful if you have a home loan or business-related loan to pay off.
Sometimes, sole traders try to pay off as much as they can as soon as they receive a sizeable amount of money. They may use that money to pay off a more significant portion of their mortgage or their business loan. This can, however, be a bad idea. This is as you never know how much you’ll make from one month to the next as a sole trader. An offset account allows you to save the money you would have otherwise spent.
The benefit of having an emergency fund is that you know you’ll have access to money when you need it. This allows you to work smoothly, knowing that liquid capital is available in the event of an emergency.
5. Set realistic financial goals
Setting financial goals can help you to make a profit as a sole trader. Goals give you something to work towards. Consider creating long term goals, such as expanding your business or hiring more staff. Then, create short-term goals that enable you to reach your long term goal.
When you set financial goals, you need to think about being realistic. This holds especially true for sole traders, as you can’t necessarily depend on a fixed source of income. Your financial goals should enable you to make a profit and grow your business. You can, for example, decide that you want to reach a particular profit margin every month. Next, you should create a strategy that allows that to happen. Maybe you need to hire a few employees so you can take on more work, or you may need to cut back on expenses.
Realistic financial goals can enable you to see positive economic growth as a sole trader.
Conclusion
Sole traders don’t have a fixed income and instead are paid on a project by project basis. Some sole traders run a business where they hire employees, while others choose to work by themselves. As a sole trader, you need to consider how you manage your finances. This is in order to ensure that you’re making enough money to grow your business and live comfortably at the same time. A solid financial plan that enables you to reach your financial goals, as well as a reasonable budget, is essential to financial success as a sole trader.
Sole traders also need to deal with certain career risks from time to time. An example of this is being sued by a client or experiencing business disruption. When this happens, you can experience uncertainty as a sole trader. But with the help of exclusive trader insurance, you don’t have to. Learn more about getting financially covered and compare public liability insurance for sole trader by clicking here.