Better money management for sole traders

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21st July, 2020

5 smart ways sole traders can manage their money better

No matter what line of work you’re in, if you’re a sole trader then managing your money is key to your success. Here are some tips on how to up your game.

When you’re self-employed or doing contract work as a freelancer, the flow of income is rarely steady and often in lump sums, followed by periods of drought.

Without control, it can be a feast-to-famine experience for sole traders as you go from spending big after receiving a lump sum, quickly followed by overloading your credit while you wait for the next payment.

We all know the tradie with the amazing ute who has to borrow a few bucks just to buy lunch.

READ: What’s the difference between a sole trader and a company? (Australia)

So how do you manage the cash flow and minimise your tax while building your business and your wealth?


1. Know your financial position


This might seem like common sense, but many small business people do not have a true grasp of their net position during the year. You just have a good set of books and accounts that show you your assets and liabilities, especially as you approach May and June each year.

This puts you in the driving seat, and with some guidance from your accountant you can look at using salaries or dividends, superannuation contributions, bringing forward or delaying income, purchasing or delaying equipment or stock to maximise your after-tax position.

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2. Pay yourself first


Get in the habit early on of taking a basic wage for yourself weekly or fortnightly. It does not have to be much to start with, but it should be enough to cover your very basic living costs.

Many people live off their savings while starting a business; I would much prefer they lend those funds to the business and set themselves up with a basic wage.

This sets a good habit in place, especially if you have a spouse, partner or family, as they rely on you. They may support you in your endeavours, but a steady cash flow will help relieve their concerns. It also means you set a key business indicator (KPI) within your business to at least fund that payment, and this may often be your first real milestone.


3. Make the most of your assets


As a sole trader, you carry a much higher litigation risk than people in paid employment. Don’t underestimate how much risk you carry.

For those assets you do own, be sure to alleviate costs where possible, including the tax burden associated with the purchase and installation of significant assets.

It’s for this reason the Instant Asset Write-off has been popular among Australian sole traders and small businesses in recent years, which as recently been expanded to include assets worth up to $150,000.

READ: Claiming the Instant Asset Write-off (Australia)


4. Don’t lock money away that you may need in the short term


Many people try to pay down their mortgage as quickly as possible, as it is what we term ‘bad debt’ or non-deductible debt. We recommend this strategy but with a twist.

Every spare dollar should be placed in an offset account against your home loan or business loan instead of actually making additional capital repayments. This has the same effect as making capital repayments and reducing your interest bill, but it allows you quick access to a source of short-term funding rather than having to redraw or use costly overdraft facilities.


5. Build wealth separate to your sole trader business


Yes, that old adage of not putting all your eggs in one basket still rings true today, especially as we see economies, markets and trends changing so quickly.

While you may love what you do and believe that it will make your wealthy, it is always good to have a Plan B. Putting funds away regularly into superannuation is building wealth in a structure that is well protected in the event of bankruptcy. Maybe do this with a view to owning your business premises in your own Self-Managed Super Fund (SMSF) eventually — make it part of your long-term business plan.

If you’re investing in property on your own, then ensure that you maximise debt on that property so in the event of litigation you have little of your equity available to creditors.

A lot of what’s involved in managing your money as a sole trader is about making a sporadic cash flow appear more stable; ensuring that you are not overexposed to your business to the detriment of your family wealth; and finally that you are protecting that wealth from business risks.

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.