Self-employed people emphasise profitability, leaving no stone unturned to stay ahead in the race of cutthroat competition. Associated with freedom and flexibility, building an empire on your own terms is not a cinch. Business success is driven by dedication, long-term commitment and an unrelenting approach to gain a competitive edge. From freelancers to small businesses, everybody stumbles into money pitfalls that jeopardise long-term success. Finance is an extremely complicated aspect with which even experienced entrepreneurs struggle.
Most startups shut down in the first five years since inception, which should come down to improper money management. People often take stock of cash coming in to determine their financial health, but they fail to take into account cash going out. Increasing profits cannot provide certainty about your business success, as it is likely that expenses are also increasing proportionately or disproportionately.
Financial mistakes that self-employed people make
Here are the financial mistakes that the self-employed make:
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Mixing personal and business finances
It is very common for the self-employed to mix up both personal and business accounts, the biggest reason for losing track of actual business expenses. This will make it complicated for you to determine actual profits and tax obligations.
How to fix it:
- Open a dedicated business bank account.
- Try making all transactions online to avoid manual accounting of outgoings.
- Pay yourself a fixed sum every month, called a salary.
- Use accounting software to categorise transactions automatically.
Bookkeeping will not only give you a wrong impression about your actual financial stance, but it will also preclude your business from audits and disputes.
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Ignoring taxes
Waiting until year-end to calculate your taxes will take you by nasty surprise. It is quite common for the self-employed to miscalculate the burden of taxes, as no one is withholding it from their paycheque.
How to fix it:
- Set aside about 30% of each payment for this purpose.
- Consult a tax professional to understand deductions and actual tax liabilities.
- Estimate quarterly tax payments to avoid penalties.
Treat taxes as regular expenditure rather than a one-a-year obligation.
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Underpricing products and services
Underpricing seems to be the best strategy when you are trying to capture market share. However, sometimes entrepreneurs raise prices due to fear of losing customers. Do not forget that this is a short-term benefit for a long-term loss.
How to fix it:
- Research the market and know the prices of competitors dealing in your niche.
- Factor in overheads, taxes and other obligations.
- Offer combo deals to encourage customers to buy from you. Combo deals are priced lower than individual units, yet they are more profitable for companies.
Extremely low prices will never work to your advantage. People will surmise that your products are substandard.
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Not understanding loans
At an unspecified time in future, every business struggles with cash flow problems. You might need to purchase more space, or you may need money to meet day-to-day operations because your sales are sluggish this time. There are various types of loans for self-employed people, and they all work differently.
You must know which loans work best and when. For instance, loans for the self-employed include both secured and unsecured loans. The former is subject to collateral, which you may lose in case of default, but they charge lower interest rates than the latter.
Understand the difference between business credit cards and business lines of credit. Your personal credit score will be perused to approve your loan application. It is vital to understand all terms associated with loans, so you do not end up choosing an expensive offer.
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Poor cash flow management
Self-employment, especially if you are a freelancer, is subject to irregular income. Maybe this month you have loads of clients, and the other month you are at a loose end. You will have to plan ahead to minimise the impact of a dry spell.
If you run a company, you may still face a cash shortfall. Loans may be a solution to fix it, but only if the cash flow problems are temporary.
How to fix it:
- Build an emergency cushion. You will need to dip into it when you have no clients.
- Create earmarked funds to meet unexpected business expenses and day-to-day operational overheads when sales significantly drop.
- Use cash flow forecasting tools to anticipate slow periods.
- Freelancers should diversify income streams, such as projects from multiple clients.
Cash flow is fuel for your business. Keep tracking of inflow and outflow. You might have to adjust some expenses, too.
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Failing to budget
Without a clear budget, the self-employed end up overspending during blooming months and struggling during slow ones. This rollercoaster disrupts financial stability.
How to fix it:
- Create a budget that accounts for fixed and variable expenses.
- Use a budgeting app to track spending. It will automatically record all transactions if it is linked to your bank account.
- Review expenses and, if needed, adjust them.
Budgeting helps regain control over your money by introducing you to your true financial picture.
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Not investing in growth
Whether you are a freelancer or run a fully-fledged business, investing in marketing and training is vital. Failing to do so will leave you behind in the race of competition.
How to fix it:
- Make sure that you allocate some profits to a marketing budget.
- Hire talented people even if it means giving them handsome remuneration. Invest in their training.
- Freelancers also need to polish up their skills.
- Invest in technology that saves time in doing repetitive, monotonous tasks.
The final word
Self-employed people often struggle with money management, which leads to business failure. There are some mistakes that cause money troubles. Unfortunately, their impact is far-reaching.
Discipline is the key. Make sure that you handle all aspects of your business, so you know the actual picture. You can accordingly frame strategies and thrive. If you are still struggling, contact a business advisor.