6 account/finance management tips for solopreneurs
Good financial hygiene is a must for solopreneurs as it instils in them a discipline to keep personal and business expenses separate, helps in proper bookkeeping, payment of taxes and setting aside money for contingencies.
Monday December 07, 2020,
6 min Read
Managing a business can be a tough task, especially if you are doing everything alone. And yet, there is a certain satisfaction and pride that comes with being a 'solopreneur,’ one who takes all the responsibility of a business on his shoulders.
Whether it's due to the thrill of solely handling a business or the convenience of making decisions unilaterally, solopreneurship is steadily on the rise. The fact that they are the only brains behind their ventures, solopreneurs regularly face unique challenges, most of which are related to their finances.
This blog is an attempt to address these issues and aid budding solopreneurs in managing the finances of their venture without a hassle.
So let's get started with six proven financial management tips for budding solopreneurs:
1. Have separate business and personal accounts
The foremost thing that a solopreneur should do is to have separate accounts for your business and personal finances. Yes, we understand that having two different accounts may seem like an additional headache to you, but it will do you a world of good in the long run.
Having separate bank accounts will help you keep track of your business's progress and better record-keeping. This way, you can identify the sources of your income, prepare your taxes better, and keep track of tax-deductible expenditures.
With a joint account containing both your business and personal records, complying with tax laws becomes next to impossible. For example, if you have a mixed account, it is hard to figure out which of your restaurant or travel expenditures are for business and which are personal. Having a joint account would also prevent you from claiming tax deductions for your business expenses, thus causing you losses.
2. Track expenses methodically
Tracking your business expenditures is crucial to understand the profit margin and cash flow. However, financial tracking seldom gets the importance it deserves from solopreneurs.
In the words of Spencer Barclay, the founder and CEO of Savology, "Far too many solopreneurs will set up a spreadsheet for tracking their expenses, but once they get involved in the daily grind, they end up never using it. The result is that they have no idea where their money is going." For solopreneurs, this can lead to overspending or missing key deductions during taxation.
To avoid such scenarios, it is better to keep track of each business transaction, either manually or through bookkeeping applications that track and manage finances and ledgers. This reduces the task of making manual changes after every transaction, reducing human errors, and giving you a 360-degree visibility of cash inflow and expenses.
3. Diversify your revenue sources
For solopreneurs, it is pivotal to get revenues from multiple sources, especially given the turbulent nature of the market. Many solopreneurs consider their ventures as a side-hustle while they make money from full-time work. This reduces your reliance on one income source, thus reducing risks.
Income from multiple sources also reduces your dependency and desperation, and with less risk-taking involved, you end up making better business decisions. Hence, if you are a solopreneur focusing only on your venture, it is time to think about launching an additional product or service. You can start with something you are already good at (e.g., a hobby or a passion that can be monetised) or something associated with your venture. This will ensure that you play to your strength, which improves the chances of success.
4. Get receipts of your business expenses
While being a solopreneur means you have to pay more taxes than individuals with jobs, you can also claim business-tax deductions. These deductions greatly reduce your business’s taxable income, reducing the actual tax amount to be paid. However, you have to prove that the tax deductions are valid, which are only possible through receipts.
Thus, you must keep expense documents like invoices, receipts, and employee payslips handy. Modern digital tools also help you store such key documents digitally for greater convenience and less paperwork. Reducing the amount of paperwork not only saves you a great deal of office space, it also reduces the chances of your documents getting misplaced.
In case of a calamity or a natural disaster, your receipts and bills could easily be damaged beyond recognition, which can be avoided if you go paperless. Moreover, digitally saving your important documents make their retrieval quick and easy. This not only saves you time, but it is also eco-friendly.
5. Use a business credit card
Business accounts allow various options for making payments, including NEFTs, online transfers, cheques, and debit or credit cards. However, there is an old saying that warns us against using our own money for our ventures. Using a business credit card, you not only keep your accounts separate, but you also get a detailed list of your expenditures in a single place.
Using credit cards also ensures that you do not pay directly out of your pocket and allows you some time to repay the bills on a card. This reduces the outflow of cash and helps you in paying the outstanding amount together with better record-keeping.
Today business credit cards are readily available in the market and come with various usage limits per month. Choose a credit card that allows you an optimum credit line based on your business needs to streamline and monitor your expenses.
6. Save for rainy days
If Covid-19 has taught us anything, it is that we must always save for emergencies. The pandemic has been especially rough on solopreneurs, forcing many of them to shut shops. Thus, it is a good practice to keep some money aside for bad days.
Unexpected expenses or business losses can greatly impact a business, and a wise entrepreneur always keeps a percentage of earnings aside to sustain the business. Several businesses practice keeping two-thirds of their monthly income aside so that they can sustain their organisation for at least six months if things go out of hand.
Managing finances can be challenging for solopreneurs, but technology has made it a much simpler task. Today, there are a variety of tools that help solopreneurs monitor and manage expenses. Depending upon your business needs, you can choose from a variety of software packages that help you get a holistic overview of your spendings. These packages can help a business in bookkeeping, filing tax returns, keeping a digital record of expenses, and tracking inventory. Thus, such tools help solopreneurs save a great deal of time and effort.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)