There are a lot of great things about being self-employed. You get to set your own hours, you’re in charge of your own future, and you can even wear sweatpants to work if you feel like it. But there are a few aspects of self-employment that aren’t so wonderful. For one, lying awake at night worrying about when your next invoice will get paid.
When you work for yourself, you don’t get a steady paycheck every two weeks. Instead, you are at the mercy of your clients and customers. You could ask for net 30 payment, but if your big client has a standard policy of net 60 or net 90, they’re unlikely to bend the rules for you.
To reduce the number of sleepless nights you spend tossing and turning, learn how to manage your business’s finances. This will help you better plan for the future of your business and your financial life. Here are seven tips to help you get started.
1. Keep your business and personal bank accounts separate
If you’re a sole proprietor, there’s no rule against keeping your business and personal money in one bank account. However, to ensure that you stay on the IRS’s good side and get all the business deductions you’re entitled to, you’ll need to keep careful records of income and expenses and document which transactions are for the business.
If you’re running a photography business or selling crafts on Etsy or if you work from home, you risk the IRS deciding your business is a hobby and disallowing your deductions. Play it safe and open separate accounts for business and personal use.
2. Take advantage of accounting software for self-employed workers
There are many easy-to-use software programs designed specifically for self-employed workers who aren’t accounting experts. Whatever solution you choose, you’ll need one that handles basic tasks like recording income and expenses, tracking deductible expenses, creating invoices, and generating financial statements.
Additionally, you’ll want to learn how to read financial statements. Your income statement, balance sheet, and statement of cash flow are three key financial statements to understand.
- Income statements show your businesses revenue, expenses, profits, and losses during a certain period.
- Balance sheets show your company’s assets, liabilities, and equity as of the date of the created balance sheet.
- Cash flow statements show cash coming in and going out during a certain period.
Financial statements provide a measure you can use to assess the financial health of your business at any given time. You can learn more about financial statements with the help of SCORE and your local Small Business Development Center (SBDC).
3. Plan for lean times
Cash flow is often erratic when you’re self-employed, so plan ahead for times when cash isn’t flowing. Set aside savings in both your business and your personal bank accounts to tide you over, so you don’t end up relying on credit cards or loans and getting into a financial hole.
4. Consult an accounting professional
According to research by Intuit, 89 percent of small business owners say using the services of an accountant or other financial adviser has made them more successful. Recent changes to the tax laws have caused a lot of uncertainty, so getting the help of an experienced accountant at tax time will save you a lot of headaches. It’s also a good idea to consult an accountant before choosing your bookkeeping software. An accounting professional can help you find a solution that will grow with your company if you ever decide to expand.
5. Charge what you’re worth
Are you still charging the same prices you did when you were starting out? Do you feel nervous asking new clients for a higher rate, or do you think you’re not a good negotiator? Start tracking time spent on each client or project. When you know how much time you spend on different projects, you can gain a better understanding of what your time is worth. And generating reports for similar projects can help you negotiate your price with new clients.
Plus, tracking your time will also reveal how you really spend your days and help you pinpoint where your time could be put to better use. Time is money, especially when you’re self-employed, and you need to spend as much time as possible on things that generate income.
6. Stay on top of your finances
Reviewing your books at least once a week can help you see what’s on the horizon. For example, if a big insurance payment coming up, you need to be sure you have the cash to cover it. Maybe a key client’s invoice is overdue and you’ve forgotten to nudge them. Create a cash flow projection plan and compare it to where you’re at currently, to see how well you’re managing your finances.
Taking these simple steps, and taking control of your business finances, can put you on the path to self-employed success — not to mention help you sleep a lot better at night.
*SCORE and the LA-SBDC are clients of my company.