5 Tips for Managing Your Finances as a Sole Trader

A sole trader runs a business by themselves. They are legally responsible for all aspects of business and have complete control over everything. It is important for a sole trader to manage their finances, as it is the foundation of the business.

Table of Contents

1. Budgeting

A budget is an essential plan for a business. It outlines the costs of running a business and accounts for future expenses in order to increase profit. A business budget is important as it lets you:

  • Know how much profit you need to make in a set time
  • Set realistic financial goals
  • Plan for necessary business expenditures
  • Share your profit targets with staff and employees. 

Having a budget lets you more efficiently manage your business’ cash flow. When planning a budget, it should include a profit and loss report and a balance sheet. The profit and loss report includes your record of making and losing money for the business, such as employee wages. A balance sheet shows the business’ current financial position. A tip for budgeting is to lower income and expenses in order to be more prepared in the instance this happens. 

2. Sole Trader Tax

It is important that sole traders understand their tax obligations. Sole traders will be taxed as individual taxpayers. In a sole trader’s individual tax return, they need to report their business income. If you are likely to make more than $75,000 annually, you should be registered for Goods and Services Tax (GST). The current tax-free threshold for sole traders is $18,200, meaning that if they makes below this amount annually, they don’t have to pay tax on this income. Sole traders have no separate business tax return, but can claim deductions in some circumstances. They can claim superannuation contributions, so long as it is recognised by their fund. At the end of the financial year, the funds put into a sole trader’s personal super will be deducted from their income, meaning that they can potentially pay less income tax. 

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3. Cash Flow

Cash flow is the total amount of money going in and out of a business. As a sole trader, cash flow can vary a lot of the time. Staying on top of your cash flow can be difficult when cash flow fluctuates, especially in businesses which sell seasonal goods. Therefore, it’s important to have some form of cash flow management. Sole traders should keep on top of their records by updating them at least once every week. By doing so regularly, you’re able to see your business cash flow at any time. You can see where your profits have decreased, and find it easier to attribute when and where that occurred.

Furthermore, another method is for sole traders to have a separate account for their business profits which pays their set wage at a certain time every month. This account will be separate from the sole trader’s personal everyday account. 

4. Business Forecasting

Business forecasting is predicting your future business developments. This is based on your past and current business activity from your financial statements. It provides a realistic idea of where your business is headed in the future in order to form business plans. Forecasting also lets you see potential future problems, and fix them before they become a reality.

When you first start your business, it is advised that you complete monthly or weekly forecasting. As the business becomes more established, a sole trader can switch to making these forecasts annually.

5. Sole Trader Insurance

As a sole trader is responsible for everything in the business, they will have unlimited liability. Therefore, in the instance that a sole trader’s company goes into debt and they cannot pay it back, their personal assets will be used to repay this debt.

The insurances a sole trader has will depend on the type of business they are running, e.g. In a horse riding business, they will need personal injury insurance. However, all sole traders should have income protection insurance. Sole traders work for themselves and profit is received by the business when they work. If they can’t work, it means no profit will come in. Therefore, income protection insurance is important for them as it pays benefits to the sole trader when they cannot work for some reason e.g. illness.

If you have any questions about managing your finances as a sole trader, you can consult a business finance lawyer for legal advice.

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