Finance Basics for sole traders
Get Your Finances Organized With Our Handy Checklist:
Focus on the following to generate money for your business:
- Keep a separate bank account for your business. Many banks offer 12-18 months free business banking. The service levels on these vary, so check that out, and shop around. Once you find the level of support and service you want, make sure you consider the rates and free banking period.
- All business earning get paid into that account, as well as pay the business expenses from it. Keeping track of income and expenditure will be simplified, plus it gives a double check for the bookkeeping figures. It saves confusion from your personal bank account being part of your business records.
- Try not to take money from your business account. Instead, regularly transfer wages into your personal account. This keeps personal spending a separate entity. Online banking will make this process painless.
- Open a high interest savings account. Put aside a proportion of your profits each month for the tax bill. Do ask an accountant for assistance or register for HMRC's free workshop, Self-Assessment for the Self-Employed. Handouts from this contain the tables to help in estimating how much to put aside each month based on profit levels.
- Sole traders are taxed as self-employed using the self-assessment scheme. Personal tax will need to be paid on your profits and class 2 national Insurance Contributions (NIC's) must be paid. Even when in other paid employment you self-employment income must be declared so the tax and NIC can be paid. Class 2 NIC's are invoiced quarterly, or pay by monthly direct debit is acceptable.
- Class 4 NIC's come into play if your profits go over a certain amount. These will be calculated by your accountant (or the HMRC if you have no accountant) in the annual tax return. They will be due to be paid with your tax bill.
- For a sole trader the main tax bill will come in January, payment is generally due by the end of January. There isn't much time to find the money, so make sure it is already saved.
- In July another tax bill will come. So, keep saving even after you've paid in January.
- Keep cost to a minimum, once established you can make purchases. Don't be tempted to splash out on a new mobile phone if the one you have is doing the job. Buy because you need something, not because you want it.
- Sales, sales, and more sales. Go find your target markets and take your business to them. Be proactive. Expensive marketing campaigns can be a waste until the business is established with a good record of customer service and excellent product. Do everything you can, cold call, ask friends and family to spread the word and/or use your services, network with other businesses in the community. Create a buzz.
- Invoice in the speed of light. Make them clear and accurate and formal looking. This shows you are serious and competent. For help with what to include go here, what to include on your stationery and invoices. If the job may take some time to conclude you can discuss with the client about invoicing in stages.
- Get paid on time. Do not be embarrassed to chase up owed monies. Make sure terms and acceptable payment methods are clear on the invoice. Give them as many payment options as you can. Make it easy for them to pay you.