All businesses need to be intelligent when it comes to financial management. This is especially true for sole traders as you are liable for any losses or debts that you incur, so you want to make sure that you are smart with your money and avoid any issues that could end up costing you out of your own pocket. Financial management can also be tricky as a sole trader, particularly when your income can change each month. By the end of this article, you will have a better idea of how to manage your money and be able to make smart financial decisions that will benefit both your business and life.
1. Build a Rainy Day Fund
First, you should have a rainy day fund. This will be money in an easy-access account that you can use to cover any outgoings during quieter periods or if you find yourself facing a sudden unexpected cost, such as equipment repair or replacement. A rainy day fund provides financial protection but also peace of mind.
2. Separate Business & Personal Finances
One of the most common mistakes that people make when setting up a sole trader business is not separating their business and personal finances. Things can get messy very quickly if you do not do this, and it can make filing a tax return a lot harder than it needs to be (and it is already stressful enough!). Additionally, without separating your finances, it can be easy to start using one for the other, which is a slippery slope you want to avoid.
3. Keep on Top of Accounts From Day One
Following this, you need to have a clear system in place for tracking your income and expenses from day one. If you have a relatively simple operation, you could do this yourself with a spreadsheet or accounting software. For more complex operations, you should outsource to an accountant (this can also free up time and energy to focus on other areas).
4. Claim The Small Business Tax Offset
The small business income tax offset is available for sole traders and can help you to lower your tax bill by up to $1,000 each year. This is a 16% discount on your aggravated turnover and is calculated by the ATO based on your tax return. There is a calculator that you can use to work out how much to enter in the new small business income field. This can make a big difference to your finances as a sole trader and helps to improve your bottom line. As a sole trader, you want to have a strong degree of knowledge of tax so that you can keep everything above board but also save money.
Smart financial management is essential to success as a sole trader. The above advice should prove to be useful and help you to improve your financial management, which could improve your bottom line and also ensure that you are sensible with your money. As a sole trader, you must ensure you’re in a secure position to ride out any bumps.