Are you itching to ditch the traditional 9-5 job
and join the self-employment bandwagon? Many people find themselves responding
to the siren’s call of self-employment and wanting to be fully in-charge of
their failure or success. It can be a thrilling challenge, handing in your resignation
note and venturing into the world unknown. However, your dream can also
come tumbling down quickly if you aren’t prepared to change from an employee to
an entrepreneur or business owner.
How to prepare yourself
Many people dream of becoming their own boss and
being the masters of their destinies. Whether you are running a shop or you
just launched a multimillion chain, it is important to take care of your
finances. You don’t want your dream to fizzle because of poor financial
management and decisions.
How do you prepare yourself financially when you
become self-employed? How do you ensure you are not making the same mistakes
others before you have made? Here are tips to help you thrive in the financial
world, whether you are working on your business full-time or part-time.
Tip: Budget for Fluctuating Income
The fact that earning are unlimited when running
your own business is the main reason why many people want to become business
owners. But one thing they fail to take into consideration is the fact that
income is not constant. One month you can make thousands in profit and the next
month you are wallowing in negatives. If you are being realistic, you really
shouldn’t expect that your income will increase consistently every month
forever. You will have dry spells once or twice a year. So you need to adjust
your mentality from a steady paycheck to a fluctuating income.
Bare bones budget is made of only essential bills
such as rent/mortgage, food, electricity. It is trimmed of all unnecessary
expenses such as coffee, magazine subscriptions, gifts, entertainment etc. This
will help you figure out the minimum amount you need earn per month. This is
the budget you will use during the difficult months.
Tip: Prioritize Your Bills and Expenses.
Although your intention is to earn higher than what
you need to cover expenses and bills, there may be times when that will not be
possible and your emergency fund is exhausted too. Therefore, you may want to
prioritize your bills end expensive such that your nondiscretionary bills come
first.
You need to have a regular budget that combines
both discretionary and non-discretionary expenses and build. This is your
typical budget and may include other expenses such health insurance. You need
to review your budget to ensure it doesn’t include luxurious expenses and
bills.
It is important to separate your business and
personal budget. It will make things much easier for you when you are planning
your finances. It also prevents you from spending aimlessly. One thing I have
noticed with many entrepreneurs and small business owners is that they make the
mistake of thinking every business expense is a good expense.
If you are a business owner, you must have an
emergency fund. There are no two ways to it. Because of the income fluctuations
we have mentioned, you may need to dip into your emergency fund unlike someone
who has a steady source of income. Apart from low income in certain months, you
might incur unexpected expenses such as unexpected machine breakdown, medical
emergencies etc. I would recommend an emergency fund of between 6-12 months of
your expenses.
Tip: Consider a Business Emergency Fund
All businesses experience unexpected bills and
expenses such as unexpected repair and emergencies. Look at your operating
costs and set aside equivalent of 3-12 months of expenses as your emergency
fund. Remember, the emergency fund is not just for taking care of unexpected
problems, but can also be used to take advantage of opportunities that arise.
When you are employed, you get used to taxes being
taken directly from your pay. It is a different ball game when you are
self-employed. You need to understand that it is your responsibility to pay
taxes. If you are not sure about this, please work with your accountant so that
you know what you owe the taxman and make sure you make timely payments.
Do not incur mindless business expenses unless it
is instrumental in the growth of your business. The reason most businesses fail
is because they overstend themselves before they are profitable. Simply, do not
spend more than your business can handle.
Tip: Create a System to Track Business Expenses
You should create a system to track your business
expenses and you shouldn’t throw away the receipts because you will need them
when you are filing for taxes.
You never know what happens tomorrow. Risk is
everywhere and if you don’t insure your family and business against risks, you
are threading on very dangerous grounds. You need to obtain things like health
insurance and appropriate business cover against theft, accident, fire and
other calamities.
What Insurance Does Your Business Need?
This actually depends on the type of business you
own, the number of employees and the income level. Think about all possible
problems that may arise and understand the different types of insurances
related to owning a business.
Self-employed people should always keep in mind
that one day they too will retire from active businesses. Most people put
retirement and other goals on the back burner while they try to get their
business off the ground. Eventually they forget about it altogether. Even if
you create a sustainable business, you should still think about retirement.
Tip: Think percentage not dollars
Set a fixed percentage of your income every month
to set aside for your retirement.