Managing your finances when self employed
Managing your finances when you work for a salary is easier than when you are self employed. You have the advantage of knowing exactly what your income would be at the end of the month. Apart from this, you know that you will receive approximately the same amount on a regular basis. This means that you can easily create a budget and manage your finances accordingly.
When you become self employed you have to adapt the method of managing your finances. Your income will fluctuate and you have to prepare for those months when there will be no income at all. Clients may pay late or relevant offices may be closed. The Christmas season is good for some businesses for instance, but bad for others. You have to cater for those public holiday periods and lack of discipline can lead to bankruptcy.
Use these guidelines to adapt the method of managing your finances to fit your self employed lifestyle.
Filing tax returns
You will make the change from monthly deducted taxes to quarterly estimated payments. Your employer handled your tax deductions, but being self-employed means you have the responsibility of completing the tax forms and making those payments. Those specific dates can crawl up to you and you may be caught without money to pay the taxes. To prevent this from happening, open a savings account where you make monthly deposits for paying the taxes. This prevents you from spending the money. Just transfer the money to your business account when the date comes and make the payment.
Large corporations have separate credit control departments. Unfortunately small businesses can hardly afford credit control divisions. As a result of this, they tend to get a lot bad debt and late payers.
Large companies even have a policy to only pay after thirty days to three months. This can seriously hamper your cash flow and even put your business in debt. Remember that the bank charges you interest on your loan, you cannot afford clients that pay poorly.
The best way of preventing and handling bad payers is to set up a specific payment policy right from the start. Make it part of your terms and conditions for services rendered and products sold. You can for instance, give thirty days to pay but ensure that all payments must be received by the third day of the month. Any overdue accounts should be followed up promptly. Keep strict record of all payments due and contact the clients on a regular basis. Don't let any accounts fall behind since it is a waste of productive time to have to call on a client several times before payment is made.
Where possible make a policy of cash up front or on delivery. Where you can, arrange for electronic transfers instead of checks as checks have to stay in your account for a few days before you can use the money and they carry the risk of fraud.
The trap of credit
Where possible try to get a debit rather than credit card since the interest on credit card debt eats away at your hard earned money. If you do have a credit card, use it wisely and not for large payments. Make sure that you pay the monthly installments.
Keep an emergency fund
Don't be one of those self employed people who fail due to cash flow problems. Create a 32 day call account or a low cost savings account to build up reserves. These reserves come in handy when you strike a slow period or have an unexpected emergency. Apart from this you need to save for your own Christmas bonus and any holidays that you aspire to take. Don't spend everything you get, make sure you have enough funds to carry you for at least three months.
Once you have adapted to the new method of managing your finances as a self-employed person, you will be able to start living a bit more comfortable.