While self-employment offers outstanding fulfillment, it comes with a good share of challenges. Unlike most employees who lead a comfortable life with a certain paycheck and tax requirements, self-employment individuals have to cope with different sets of financial encounters. Even when you are used to this industry, you have to deal with the challenges.
The industry is growing steadily with more people opting to work as freelancers rather than the traditional employees. In this article, you’ll learn about the financial management problems faced by people in self-employment.
Creating a budget and sufficient backup fund
If you are in self-employment, you probably know that there are times when you will have overflowing income but there are also times when famines are prevalent. When you understand the nature of cash flow in this industry, it becomes very easy to handle the situation with a budget.
If you combine this with a safety net, you can be sure that you will put the money to good use when there’s plenty and have something to survive on when the cash flow dwindles. If you want to remain on top of your finances, you can make it a habit to underestimate the expected income. Basically, you will have an easier time when you realize you have more than you’d budgeted for as opposed to budgeting for the money you don’t have.
The importance of an emergency fund in your journey can never be underestimated. It is your coping strategy when there is a decline in the normal cash flow. Whether it’s a client who has left or the market is going through the cyclic slowdowns, you have a safety net to keep you afloat.
Maintaining proper records
If you have an office in your home, you need to be making some regular deductions to cater for the household costs. Besides making utility bills deductions, you can also make claims on home insurance and property taxes.
When you have to keep track of all these expenses, it may be tedious if you haven’t automated the payments. To make sure you are not losing money, it is critical that you employ an integrated expense management tool that can help you keep tabs on all expense categories.
Selling your services or products and billing the clients in the right way
At times, you will find that you’ve undersold what you are offering because the focus is fixated on getting business. While it is a great idea to be having something on your plate at all times, charging below average will significantly affect your growth in the long-run.
If you focus on working with clients who have sufficient resources, the amount you charge will be the least of their worries. On the contrary, they are seeking a high-quality service from someone who can offer a personalized service constantly. By making them realize the lower price, you risk creating the impression that quality and personalized service isn’t your strength.
In addition, there is nothing wrong with asking the client to pay in installments. In fact, most will sympathize with the nature of cash flows for self-employed people. As long as your services are outstanding, you can bridge the gap between the long periods before the project is finalized.
Deciding how much today yourself and sticking to the plan
A good number of self-employed people are constantly taping into the business funds for personal use. Generally, this is not a good way of compensating yourself because it will mostly end up in a spending frenzy. All this will diminish your gross income and threaten the business. More often than not, you’ll think that you have an infinite supply of funds until the day that you will be expected to make a big ticket purchase for your business and realize you don’t have the required money.
To make things better, decide on an amount you can be comfortable with every month and stick to that. Make sure the money is deposited into your personal account at an equal interval to ensure that you won’t encroach on the business funds.
Whenever you are tempted to draw funds from the business, keep I mind that you have the responsibility to keep the business running even when turf circumstances are suggesting otherwise.
Understand the taxes and plan well
To most people, being self-employed is about freedom. However, this doesn’t mean that you won’t be paying tax; in fact, it easy for taxes to sneak in on you if you are not careful. If you don’t want to start running around trying to get money for settling the taxes, start withholding the required amounts.
You could create an account meant to hold a percentage of every sale so that you won’t have a problem making the payments. In addition, getting your HST number will raise credibility with prospective clients. If you think you’ve been paying lots of money in taxes, you can incorporate the business and benefit from better taxes and save significant amounts of money.
Poor financial management skills
Coincidently, most self-employed people are used to navigating the landscape on their own. This means that the approach to business finance is self-taught and at times insufficient.
Due to irregular financial best practices, it becomes hard to access financial help from a traditional lender. The criteria for getting credit services from these institutions discourages and rejects most small businesses every time they attempt to reach out.
If you don’t have sufficient track record that you can present to a bank, you might want to consider exploiting nonconventional alternatives for credit. With an online guaranteed lender, you can get a business line of credit designed to offer you some money when you need it. Most lenders allow you to have a pool of cash on standby and you can borrow any amount as long as you don’t exceed the allocated ceiling. In fact, most business owners find lines of credit quite useful when it comes to maintaining a smooth cash flow. However, this doesn’t eliminate the need to learn proper financial management skills so that you can stand a better chance with multiple financing opportunities.
Dealing with the financial challenges in self-employment can be daunting for most people. The tips here will help you put your situation into perspective and make the necessary adjustments. Nevertheless, it is always a good idea to seek further help if you feel that your situation requires a more personalized approach.Wake up Right! Subscribe to our Morning Briefing and get the news delivered to your inbox before breakfast!