Tips for managing your finances when self-employed

From getting your business structure right to maintaining cash flow, here are some top tips for managing your finances when you're self-employed. 

Self-employment offers many advantages—from the flexibility of managing your own schedule to the freedom to pursue work you enjoy. 

At the same time, self-employment comes with responsibility. Whether you’re a sole trader or you run a business, the buck stops with you.

We spoke with Alex Luck, Director and Financial Adviser, Everest Private Wealth, who shares his tips for managing your finances when you’re self-employed. 

1. Set up the right business structure

Many people who become self-employed are more focused, at first, on growing their business rather than on worrying about its structure. It’s all too easy to assume that the details are best left for the future. 

However, as Luck says, it’s important to set it up right—from the beginning. Or, if you’re already self-employed, then as soon as possible. 

“Many people start as sole traders or in partnerships, but realise, down the track, they should be in a company. Changing the business structure can be costly, so it’s a good idea to speak with an accountant or financial adviser early on.”

The structure that suits one self-employed person might not suit another. “A lawn mowing business might work as a sole trader, but a tech start-up with plans to employ thousands of people will need a more complex structure.”

2. Understand your ongoing tax liability 

Another temptation of self-employment is spending your tax. In addition to tax on earnings, there are often other taxes to pay, such as GST and company tax.

“Many self-employed people start earning money, then spending it, without taking tax into consideration—and once you’ve spent money, you can’t get it back.”

To avoid this, you could consider engaging a bookkeeper or investing in software, such as Xero, which can update you on your ongoing tax obligations.

Also, be sure to take advantage of any government support that may be available to you. For example, in FY20-21, businesses with a turnover of $500 million or less can claim an instant tax deduction on assets worth up to $150,000 purchased between March and December 2020, and on assets worth up to $30,000 purchased between April 2019 and March 2020.

3. Maintain cash flow

If an emergency strikes—or an unexpected opportunity comes your way—then you’ll need cash. “So, try not to run your business on empty” says Luck.

“Cash flow is king,” he says. “If you’re continually drawing out of your business, without reinvesting in it, and something comes along that derails you, then you could find yourself in a difficult position. You might be forced to sell an asset that you need.”

As a rule of thumb, consider putting aside at least six months’ worth of survival expenses—for both you and your business. 

4. Avoid over-capitalising

When investing in facilities and equipment, it can be helpful to start small.

“Do you really need to spend thousands of dollars on the latest desktop computer or would a $1,000 laptop do the same job?” says Luck. “Likewise, do you need a super fancy office, or could you just work from home?”

Rather than getting carried away with imaginings of your business as a roaring global success, focus on spending only on what you need, right now, to do the work at hand. And be sure to keep accurate records. 

5. Invest in insurance 

Most self-employed people need a variety of insurances, such as public liability and public indemnity, which can ensure that, in the case of legal issues, you’re protected.

It’s also important to think about how you would survive financially if you were forced to spend several months—or longer—out of your business, due to unforeseen circumstances, such as an illness or accident.

Income protection can help you stay on top of your business and personal expenses if you were unable to work temporarily, giving you the time you need to get back on your feet. 

“When you’re self-employed, you have to think about what would happen to your business if you weren’t there,” says Luck. “In many cases, the business would suffer quickly—and so would your income.”

Learn more about the income protection insurance for the self-employed.