For all the benefits it offers, working for yourself has one inherent downside; it will always be you who has to find a solution if something unpredictable affects your financial situation, whether that’s something which happens to you, a client, or something external like a change to interest rates or tax legislation.
Any of the above (and many others) can affect your cash flow, potentially reducing profit margins. Changes to tax legislation can also affect you, potentially significantly changing your tax liability.
If an unexpected negative factor combines with a seasonal downturn in business or some other major challenge, this can have significant economic impacts.
All of this makes it important to plan for the future. Sound financial planning, especially if carried out alongside an expert accountant who can anticipate some of these challenges, allows you to build a financial resilience into your business.
Staying Liquid by Managing Cash Flow
We’ve all heard the horror stories where businesses with high valuations found themselves caught out by too little liquidity; unable to meet their expenses in a timely fashion, needing to sell assets or borrow against them, creating bigger financial challenges in the long-term for short term survival.
Cash flow is that short term buffer, but for the self-employed, it can also be the way you stay afloat in slow months. Any unnecessary borrowing should be thought of as long-term extra cost to your business, and the best way to avoid it is to stay liquid, ready for a rainy day.
However, there’s such a thing as being too liquid; just as borrowing to solve a short term problem creates new long-term costs, keeping too much money aside in case of emergency means you’re not investing in the business at the same rate, which can slow down development. It also represents money that isn’t being drawn off to pay yourself.
So how big should your rainy day fund be? Again, the answer to that question is best determined through careful financial planning. The amount to set aside may even vary at different points in the year, especially if you know (for example) that March and April tend to be quiet months for you, or if you’re working with a client you know tends to take longer to pay their invoices.
Making Your Financial Plans
You should already be maintaining scrupulous business accounts.
One of the reasons for this is to help predict the liquidity levels you’ll need to maintain, along with helping you to understand what investments could be valuable and which are likely to cost more than you get in return. It can also be helpful to fully understand ongoing operational costs when you’re not sure whether a particular contract is worth accepting; if the profit value would be marginal to none once costs are factored in, some contracts can actually hurt your financial position to accept.
Keeping these records up to date means you always have the clarity you need to react quickly when necessary. Flexibility is a key part of successful financial planning.
Expert Insight
We mentioned earlier that having an expert accountant support your financial planning is a must. It’s not just about making sure you get the numbers right, it’s also about a second pair of eyes helping to interpret what those numbers mean.
Too many self-employed individuals have run into trouble because they mistook a bad investment as an opportunity for growth, or failed to take into account how a change announced in the Budget would affect them.
At ICS Accounting, we want to give all our customers the support they need to grow successfully. Contact us to start your discussion.
