Being a sole trader is simultaneously a liberating and terrifying experience. On the one hand, you get to decide what work you do and when you do it; you can schedule holidays for yourself without needing the approval of any kind of employer, and you can freely decline a client if you don’t think they’re on the level or if you think the work they’re sending your way won’t be sufficiently lucrative.
On the other hand, though, you’ll really need to step up your game if you’re thinking of becoming a sole trader. The onus will be entirely on you; there’s no boss breathing down your neck, true, but there’s also nobody giving you a workload, nobody to tell you what to do at every stage of the day, and – crucially – nobody handling invoices but you. With all that responsibility, it can be hard to keep track of your finances. Luckily, we’ve got some tips for you to help you handle finance when you become a sole trader.
Keep a detailed diary
Believe it or not, there’s almost nothing that gets sole traders on finance more than a disorganised diary. If you don’t know when you’re meeting clients, when you completed a work project or when an invoice is due to be paid, then you can’t possibly keep sufficient track of your finances. It’s a great idea to keep a diary of work completed and yet to be completed, because that way you’ll always have detailed records of projects and you’ll be able to keep track of when money is coming in and going out.
Don’t be afraid to take out a loan
As a sole trader, your income will be inextricably tied to your personal finances. If your company or your business is suffering, that means you’re probably suffering too. With that in mind, don’t be afraid to take out a loan. Loans might sound scary, but they’re a great way to give your business a little cash injection while you wait for things to pick up a little. Times like the post-Christmas blues and the summer slump are great examples of times when a loan might be something to consider. Find yourself a good, reputable personal loan lender and put your mind at rest.
Chase your invoices
We know, we know; nobody likes to be that person, always nagging on the phone or via email for invoices to be paid. The harsh truth, though, is that you’ll have to do this, especially if you don’t intend to clue anyone else in on your business. Most clients don’t forget to pay invoices because they’re actively trying to avoid payment; they simply forget, and it’s your job to remind them. Of course, if clients do deliberately dodge paying their invoices, there are legal avenues you can go down, but you’ll need a detailed invoice and time stamps to make sure that you’re 100% knowledgeable about your situation.
Have a backup fund
This is one of the most important things you can do as a sole trader, and it’ll save your life one day. Say you’re not well, or you’re suddenly called away on urgent family business. What happens to your company? What happens to your trade? Most importantly, what happens to your profits? You’ll need a contingency fund in place to make sure you’ve got enough to live on while real life works its dubious magic. Set up a bank account and make sure you put enough in every month to boost your funds for such an occasion.
Be prudent with taxes
One area you might not be used to as a sole trader is tax payment. Your employer would usually take care of this via their accounts and HR departments, but when you’re a sole trader, you are your own HR and accounts departments. With that in mind, you’ll need to make sure you submit prompt and accurate tax reports for your company, as well as paying your taxes on time. You’ll need the appropriate self assessment tax return form. Don’t forget that if your turnover is below the VAT threshold, you’ll need to apply for that, too.
Create a business bank account
It might sound like a roundabout way to do things, but a business bank account is a great idea for a number of reasons. You will want to keep track of your funds both as an individual and as a business entity, and there’s no better way to do that than to create a business bank account. Each time you complete a project or complete work for a client, place the money into your business account, then pay yourself from said account. That way, you’ll have a clear record of your earnings, your financial assessment will be better, and you won’t be tempted to splurge your entire earnings on something frivolous.