Tips for Managing Your Finances as a Sole Trader

Sole Traders operate their business on their own, and starting a new business is a challenge for anyone but can be especially challenging for a sole trader.

Being responsible for every facet of the business includes managing the company’s finances. The very foundation of the business is based upon the financial well-being of the company, so effectively managing the finances is critical to the success of the business.

Here are some important tips to help you manage the finances:

Budgeting

Budgeting is critical – it outlines all of the costs in running your business, helps you plan for future expenses, helps set realistic goals, and helps you increase your profit. A budget allows you to manage your business cash flow.

A budget should include a profit and loss report and a balance sheet. A profit and loss report is a record of revenue generated (such as merchandise/service sold) and expenses (such as employee wages, rent, etc.). A balance sheet shows the current financial position of the business. To effectively manage your cash flow, keeping income and expenses low will help you be prepared for future expenses.

Taxes for Sole Traders

Sole traders are taxed as individual taxpayers, so it’s important to understand the tax obligations that come along with this type of business structure. The business income will need to be reported on the sole trader’s individual tax return. If you anticipate making more than $75,000 a year, you should be registered for GST (Goods and Services Tax). If a sole trader makes $18,200 or less a year, they don’t have to pay tax on the income. The current tax-free status is currently held at that threshold.

While sole traders have to report their income on their individual tax return, and do not have a separate business tax return, they can, however, claim deductions on the tax return in some circumstances. Superannuation contributions, if recognized by their fund, can be claimed at the end of the year. The funds put into a sole trader’s personal super will be deducted from their income – allowing for the potential to pay less income tax.

Cash Flow

Cash flow management is key in a sole trader’s business. The total amount of money being received and distributed out of a business is the cash flow. It can change a lot of the time so it’s very important that the cash flow is updated at least once a week. By establishing a regular schedule of reviewing the cash flow status, you can easily see if profits have decreased or if expenses have increased and determine when and how that happened.

Another important cash flow practice is to establish separate business and personal accounts. This will enable you to easily see the business profits and expenses separate from your own personal funds.

Forecasting 

Business forecasting is a practice of predicting your future business developments. Forecasts are based on your past and current activities and are drawn from your financial statements. Forecasting allows you to see potential future issues and fix them before they become real.

Forecasting should be done on a weekly or monthly basis in the initial period of a business. As the business becomes more established it can be turned into an annual review and update.

Sole Trader Insurance 

It is critical that a sole trader has the proper insurance coverage, as they are responsible for everything related to their business. For example, if a sole trader’s company goes into debt and cannot afford to pay it back, their personal funds will need to be used to repay the debt. Depending upon the type of business the sole trader may have, they will want to make sure they have the most suitable insurance coverage they need for their business – personal accident, business interruption, and/or liability insurance needs are just a few of the important types of coverage they may need to hold.

In addition to the budgeting and cash flow needs of your business, it’s critical to identify and maintain suitable business insurance for your sole trader business.