Sole Traders - Get through Covid-19 and beyond with these 5 financial tips

Tuesday, November 24, 2020

Managing your money is one of the keys to your success as a sole trader, and if COVID-19 has taught us anything, it’s the need to future-proof our business from future adversity.

There is so much freedom that comes with running your own business and managing your hours, it’s no wonder so many people find the idea appealing. At the same time, it brings with it a large degree of responsibility. Managing your money is one of the keys to your success as a sole trader, and if COVID-19 has taught us anything, it’s the need to future-proof our business from future adversity.

When it comes to operating a business in 2020, we are all in unchartered territory. Both big businesses and small have all been affected by the global pandemic, with many forced to shut down for long periods on end, or to completely pivot their business to stay relevant in these changing times. The threat of lockdown is constantly overhead with all business activities and coming into contact with someone with COVID-19, or a staff member contracting it, can have a serious impact on your business.

Without a plan in place to help you manage your finances, the most likely outcome will see your business closing its doors for good.

Financial management isn’t just beneficial for difficult times either. With a strong plan in place, you can see your business soar to new heights. Here are some tips to help you manage your money effectively to see you through this tough year and onto many more.

5 tips for managing your finances as a sole trader:

  1. Budget – you need to know where your money is going, how much you are bringing in while keeping track of your assets and liabilities in such a volatile market.
  2. Pay yourself – it can be all too easy to keep feeding money back into your business and ignoring your personal life.
  3. Protect your assets — as the sole owner of the business, you take on all liability should the worst eventuate. You need to make sure you protect yourself from this outcome.
  4. Save for a rainy day — saving well earns interest and gives you more money to invest in the business.
  5. Build outside wealth — Building wealth outside of your business will afford better protection when times are tough

1. Budget

Many small business owners dive into the market without so much as a sideways glance to consider a plan forward. Numbers are running in one ear and out the other, with the focus on getting ahead and staying there. Yet, this can’t happen without a close look at the numbers.

COVID-19 has made this all too clear.

Without a solid business plan in place, or cash buffers in the business and personal accounts to see them through a rainy day, many businesses have been racking up immeasurable debts in the past months, blissfully unaware.

A budget is an essential plan for any business. It not only looks at the costs of running the business but also takes into account future expenses so you can forecast your business’ profitability. It goes side by side with an in-depth business plan that itemises how you plan on bringing this money in.

With a strong business plan and budget in place, when a disaster such as COVID-19 hits, you have the opportunity to revisit the plan and finances and revaluate how your business will get through it and what the dollars might look like as a result.

Having this overview on your profits, assets and liabilities, you can tackle any challenges head-on and push through to the other side. If numbers aren’t a strong point for you, then talk to your account and educate yourself on the KPIs and benchmarks within your industry. This is the best starting point for getting your finances in order.

2. Pay yourself

Many small businesses are run from the day-to-day, leaving very little at the end of each week. Often, small business owners feel guilty about taking from the business, so instead pay themselves titbits of money here and there.

The problem is, your own personal bills don’t just stop when your business is struggling and you don’t feel like you can take a cut.

It goes back to your budget. Your own take-home pay should be factored into this budget each week, so you are aware of just how much the business needs to make as a minimum.

You can then be guided by these numbers, with contingency plans put in place if profit dips. Things such as chasing outstanding debtors, finishing off open jobs and invoicing for them, or reviewing your prices and overheads and determining whether they are working, all should take precedence to choosing not to pay yourself.

Of course, your set wage could change if the business starts doing better than expected. It is worth reviewing the terms with your accountant before making these changes and ensuring everything is in place to keep track of the finances.

3. Protect your assets

As a sole trader, you have unlimited liability. This means your personal assets are on the line if your business goes into debt and you are unable to pay it back.

It is worth opening a discussion with your financial advisor t about whether or not your assets are protected should this worst-case scenario play out.

The insurances you need for your business will depend on what type of business you operate and the liabilities associated with that. However, one insurance you should ensure you have is income protection insurance. This type of insurance protects your most important asset, your ability to earn an income and has the benefit of being fully tax-deductible.

The type and level of insurance is a choice that needs to be made with the advice of your financial advisor to determine the most cost-effective solution for your business needs. It then needs to be updated within your budget so the expense is accounted for.

4. Save for a rainy day

This one goes without saying, yet many businesses tend to put the money they make straight back into the business. While this can be beneficial, you also need to be putting some aside for a rainy day.

There are a number of different ways you can choose to do this. Some sole traders choose to forgo their superannuation contribution (and the income protection that comes with it), in order to put those funds into mortgage repayments to get rid of non-deductible tax as fast as possible.

But there is another way to go about it. This will help you get ahead quicker, with enough money left over to pay those essential bills at tax time. Businesses operating via a trust often have a separate business bank account to set aside their GST, PAYG and SG each week.

You can set this money and any spare dollars you have aside in an offset account against your home loan or business loan. This is in lieu of making actual repayments on it. This will reduce your interest, while still leaving the funds free and at your disposal when you need them – such as tax time.

5. Building wealth outside of your business

If there is one thing we have learnt during COVID-19, it’s that economies, markets and trends can all change so quickly. That’s why it is always so important to have a Plan B in place. This can be done by building wealth outside of your business, which can be done in a number of ways.

As a sole trader, you can set yourself up with a Self-Managed Super Fund. It can contribute to a longer-term plan of being able to purchase a commercial property from the fund down the track, so you no longer have to pay rent to someone else.

It is also important to put a focus on building equity and not debt when it comes to your business assets. By revising your business plan and putting in some long-term goals, you can make sure every penny that is coming into your business is being put to good use to get your business ahead.

Planning ahead is key. No-one could have predicted the year that was and the impact COVID-19 would have on businesses. That doesn’t mean we can’t use it as an opportunity to future-proof our business against future adversity. By taking control of your finances and putting a proper plan in place, your business will not only survive – it will thrive.

If you are looking for a helping hand, then contact the team at IMFG today.


Identity McIntyre Pty Ltd and its specialist financial advisers Angus Dockrill, Scott Douglas, Dan Blatch, Lisette Walsh, Vince Dore, Sangram Rana, John Foley and Matthew Bull are authorised representatives of IMFG Pty Limited, Australian Financial Services Licensee number 527657 Registered Office at: Level 8, 171 Clarence Street, Sydney NSW 2000. These representatives are trading as IMFG.

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