Being self employed can be very rewarding, but it comes with a few financial challenges our W2 brethren don’t have to deal with. Some issues I have seen that are common among the self-employed.
No visibility into how much the business is making or spending
“Feast or Famine” income for the owner/agent
Some suggestions to resolve these issues:
Separate Business and Personal Accounts: Make sure you have checking and savings business accounts separate from your personal accounts. It can become a real challenge if you are robbing from the grocery money to run your business.
Create a business financial plan: A rolling 12 month forecast of income and expense for your business is a great tool for making sure you have the cash for annual expenses or optional events when the need arises.
Keep good “books”: A ledger will work – but the most common “industry standard” approach is Quickbooks. If connected to your business bank account(s), this can be really straightforward. You should produce and review Profit/Loss reports and a Balance Sheet.
Generate cash reserves in the business. This may be the most challenging, and most important part of managing your self-employed cash flow. You should maintain cash reserves in your business for each of the following:
Taxes: Set aside enough to cover both your 15% Self Employment tax as well as your Federal Income tax on any profits. If you can pay these quarterly, even better. If you have State Income tax, include that as well.
Monthly Expenses: How much you need depends on how much your business income varies. For seasonal businesses like travel or real estate, a couple months of monthly business expenses will make sure you keep the doors open during the slow times.
Salary: Calculate a constant amount to pay yourself every month – and then put away a couple times that to make sure you can pay yourself during the slow times. A business with very stable income can get away with less reserves, but a variable business should think about a couple months of owner pay in reserves.
Future Expenses: Most self-employed individuals have occasional expenses that are above and beyond the normal monthly expenses. These might include annual insurance premiums or trade show trips/conventions. Setting aside a little each month so the cash is available when the time comes is really handy.
If you are self-employed and would like to talk more about these suggestions, schedule some time for us to talk.