working from home


17th August, 2020

5 financial management tips for sole traders during COVID-19 (and beyond)

If you’re a sole trader then managing your money is key to your success and, especially in 2020, your business’s survival. Here are some tips on how to you can make the most of your hard-earned dollars.

Sole traders may have missed out on some of the COVID-19 support on offer, which has meant they’ve had to be extra resourceful to keep their businesses afloat. And that’s just one of the challenges they face.

You could be working this week and then in lockdown next week because of a Government directive, or because you or a family member is a close contact or a casual contact of someone who has tested positive to COVID. If you have staff, the damage could be compounded.

Without a plan (and a contingency plan), it could be a feast or a famine experience for sole traders.

This year, now more than ever, it’s important to have a close relationship with your accountant. Even though your trading income may have taken a hit, it may have been replaced with some Government assistance and, as there was a change to the way assets were depreciated in 2019/2020, it may mean the depreciation expense you rely on to reduce your tax is no longer there.

We all know the horror stories and stress caused by an unexpected tax bill.

So, how do you manage cash flow and minimise your tax while navigating these tricky times, protecting your business and your wealth?

5 key financial management tips for sole traders:

  1. Know your numbers — You’ll want to have the ability to track cash flow, profitability, assets and liabilities all in real time
  2. Pay yourself first — Knowing when and how much to pay yourself has a direct impact on your business’s sustainability, so it’s time to get smart with it
  3. Protect your assets — Super, insurance or hope for the best? Managing your wealth means knowing how to protect it should the worst case occur
  4. Get smart with savings — Among other things, putting excess cash into a loan offset account could save you money in the long run
  5. Diversify your wealth — Building wealth outside of your sole trader business will afford better protection when times are tough

READ: Sole trader tax: What you need to know

Stay in the know

Sign up for added insights and business-critical news from MYOB.

A valid email is required
Congratulations! You've successfully subscribed to our newsletter!
Something went wrong

1. Know your business numbers and your financial position

Small business owners may well be in the driver’s seat, but many of them are driving without a roadmap and, if they’re looking at their numbers, they’re looking at them through the rear vision mirror. But it doesn’t have to be that way.

COVID-19 has brought to light issues that previously had been glossed over.

Many businesses have found themselves with no cash buffers in their business and personal accounts. They’d been driving blindfolded, not aware of their business profitability or the level of debts racking up.

Being able to see the profitability, assets and liabilities of your business in real time means that you will hit those road humps a lot less frequently.

Talk to your accountant to get your numbers online and training on how to get the most from your online accounting package, to get the benchmarks and KPIs for your industry so you can set your 2020/2021 pricing and targets tweaked for the present economic climate and your situation.

2. Pay yourself first and set yourself targets

Running a small business can be tough and there’s a tendency to take what it left at the end of the week.

Or maybe you take a standard amount of money willy-nilly, irrespective of whether the business has made that much money. And that’s when the ATO and credit card debts start to blow out.

Whenever I suggest business owners pay themselves a regular amount from their business, it’s met with trepidation and questions like “but what if there isn’t enough money?”

The fact is, your personal bills don’t reduce if your business’s profit reduces.

Prepare your personal budget and determine an amount you need to generate from your business with a little buffer added.

So, guided by your numbers and your targets, if your profit is dipping and it’s likely that there won’t be enough money to make that weekly amount you need, you could put some of those contingency plans in place. Chase outstanding debtors. Finish off that job and invoice a few days ahead of schedule. Review your job costs and compare to your quote. Review your overheads. Revise your hourly rate.

You’re free to take more money out later on when cash builds up and you have your tax and employee obligations (if you have any) set aside. Again, your accountant can assist you calculating these numbers.

3. Protect your assets

As a sole trader, your liabilities are unlimited and both your business and personal assets are on the line and many are unaware of this.

Now may not be the optimal time to change business structures, as doing so may affect your eligibility to COVID-19 support, but it may be worth having a chat to your accountant to ensure your assets are adequately protected for now and whether it may be prudent to change your business structure in the future.

READ: What you need to know about business structures

An objection I’ve often heard over the years about a corporate structure was the need to pay workers compensation and the obligatory 9.5 percent superannuation. Before you started your business, you were covered in the event you were hurt on the job and were also building up a nice nest egg for your retirement.

It’s obviously up to you as the business owner whether you want to take out income protection in place of workers compensation and then make voluntary contributions to superannuation. The first step is to factor these expenses into you’re your budget, price accordingly, and go from there.

It’s almost certainly worth having a chat to your accountant and your financial planner for their advice on this matter.

READ: Key types of insurance for sole traders

4. Be proactive with spare dollars: Set aside and save

Following on from the previous point, you may strategically choose to not to contribute into superannuation, but instead put those funds into your mortgage and pay down your non-deductible debt as quickly as possible.

There’s another twist that could get you ahead even quicker and ensure you have money to pay the tax man at BAS and tax time.

Businesses operating via a trust often have a separate business bank account to set aside their GST, PAYG and SG each week.

As a sole trader, you could set these monies and any other spare dollars aside in an offset account against your home loan or business loan instead of actually making additional capital repayments. This strategy will reduce your interest bill and will ensure you have the funds to pay the ATO when the time comes. Interest rates are low at the moment, but it’s a saving nonetheless.

The offset account also has an advantage over dumping funds straight into your loan as redraw fees may apply.

5. Building wealth outside of your sole trader business and plan for the future

When you backed yourself and started your business you took a considerable risk. And you deserve to be rewarded well for the risk you took.

Some believe that their retirement nest egg is in fact the business they are building. But we’ve seen during COVID-19, businesses that have been successfully operated for generations have been wiped out overnight and some have even been left with debts.

READ: What do I need to retire at 60?

I’ve personally witnessed businesses having to be sold in a hurry due to an owner suddenly falling ill or passing away, a marriage breakdown or other unforeseen events and what the business was sold for was considerably less than anticipated.

We don’t like to think of these things, but burying our heads in the sand isn’t the answer either.

You have a fabulous support team in your accountant, solicitor and financial planner so book a zoom call and start hatching your roadmap to secure your financial future and protect your assets.

Many small business owners setup their own Self-Managed Super Fund (SMSF) with a view of acquiring a commercial property to operate their business from instead of paying rent to someone else. This is one of the strategies many of my clients used even those that weren’t keen initially to contribute superannuation but when it was part of a longer-term plan, they could see the benefit.

They say adversity forces us to focus on the things we need to learn and hope my business tips inspire you to refocus and reset so that you not only survive, but thrive throughout the COVID-19 pandemic and into the future.

This advice is general in nature and not intended to substitute the advice of a qualified professional. MYOB recommends any sole trader looking to better manage their business finances should begin by consulting with an accredited accountant. You can start your search for an advisor near you here.