Working for yourself and running your own business provides many advantages, including creative freedom, independence, and the flexibility of managing your own schedule. At the same time, self-employment comes with great responsibility.
The somewhat unpredictable nature of self-employment requires you to manage your money well. The sooner you get on top of your business finances, and by extension, your personal finances, the greater your chances of running a successful business.
Leading Australian life insurer TAL’s Head of Financial Health, Jo Hetherington, shares five tips to help make self-employment work for you.
1. Explore your options when it comes to deciding on your business structure
One of the key decisions you’ll make when starting a new business is what structure to operate under. Would it be best set up as a sole trader business, a partnership, a trust or a company structure? Your business structure identifies how you operate and will be dependent on the size and type of your business, your plans to expand the business, and your personal circumstances.
It’s essential to choose a business structure that enables you to reach your unique goals. It can affect things like who is making the critical decisions, tax advantages and disadvantages, how profits and losses are shared, and any legal obligations.
It’s a good idea to seek expert advice and discuss your proposed structure with an accountant or a financial adviser.
For more finances tips when self-employed, see Small Business Answers guide to choosing a business structure
2. Consider the value of insurance
To ensure you’re protected, most self-employed people should consider a variety of insurance, such as business buy/sell, loan or key person insurance, public liability, and public indemnity.
As the owner of your own business, you are your most important asset. It’s important to consider how you or your business would survive financially if you had to spend months, or longer, out of business because of an unforeseen circumstance like an illness or accident.
Further, income protection and business expense insurance needs should be considered. These could help you stay on top of your business and personal expenses if you could not work temporarily, giving you time to focus on your recovery.
For more finances tips when self-employed, see Small Business Answers guide to business insurance
3. Stay on top of your taxes
A key consideration for self-employed people is to understand what you owe the government and what you can claim. To avoid any tax-time surprises, periodically review and think about your taxes throughout the year, not only at tax time.
Be sure to take advantage of any government support that may be available to you. For example, you may be eligible to buy equipment for your business needs and access cash flow benefits from the Federal Government’s Instant Asset Write-Off Scheme. Eligible businesses can claim an immediate deduction for the business portion of an asset’s cost in the year the asset is first used or installed ready for use. As of January 2021, instant asset write-off is only available for small businesses with a turnover of less than $10 million. The threshold is $1,000.
Suppose you do have a particularly complicated tax component to your business. In that case, you may also want to find a tax accountant to help you keep tabs on your taxes.
For more finances tips when self-employed, see Small Business Answers guide to the tax return for small business
4. Keep your cash flow going
Cash flow is the backbone of your business.
It is up to you to keep money aside. Regularly setting aside a little extra will help you manage during any quiet periods or if something unexpected pops up.
To help with your cash flow, try to bill early and collect quickly. You can do this by encouraging your customers to pay on time (or even earlier) by offering incentives to reward early payment. Creating invoices that are as clear and detailed as possible can also guard against late payments.
For more finances tips when self-employed, see Small Business Answers guide to record-keeping
5. Don’t underestimate your expenses
To get you started on the right path, you should be looking for ways to streamline your expenses. Focusing on spending only on what you need at the time will allow you to avoid overcapitalisation.
For example, when investing in facilities and equipment, it’s best to start small and take your time comparison shopping before choosing vendors or service providers that can provide you with the best possible deal.
Being your own boss also means that you need to be responsible for keeping your financial records up to date. Be sure to keep accurate records so you can confidently navigate your books in the long run.
For more finances tips when self-employed, see Small Business Answers guide to expense management