Advice on self-employment finance
The biggest difference between being employed and working for yourself is money.
When you have a job, you know that there will be a regular income and you know how much it will be. As a newly self-employed person, you can only hope that there will be something left for you when all the bills have been paid. At first, it’s unlikely that your income will exceed expenses. This is partly due to the setting-up costs. You may need a computer, a desk and some printed materials. There will be no income until you have had customers and they have decided to pay you. This takes several weeks. For most self-employed people, the first six months are financially difficult. Eventually, your business will settle down into a pattern and you will be able to forecast your earnings and outgoings. This will probably take a year.
Many people who would like to be self-employed simply can’t take the plunge. The financial uncertainty is something with which they cannot cope. One option is to start a business on a part-time basis while still employed. Then, make it grow to the point where you can risk giving up your job. As a self-employed person, you don’t get paid if you are ill or unable to work, nor does anyone make a contribution to your pension scheme.
Banks are very helpful to those starting their own businesses and a discussion with one or even two is definitely worthwhile. Call in and tell them you are starting up in business. They will discuss your financial situation and how they can help. Most give you free banking facilities for the first year; some even extend it to two. They provide advice on how to plan your business and how to organise your accounts. If, however, you need to borrow, they will want convincing proof of your ability to repay.
Cash flow is usually a major problem. Your business may be outstandingly successful but if your clients delay their payments, you’ll have no money. Getting clients to pay promptly is a major issue. You can end up in debt because lots of people owe you money. As long as your bank is supportive, that’s fine – apart from the interest payments – but the moment they withdraw support, your business is in jeopardy.
Keeping accurate accounts is vital because it provides evidence upon which the HM Revenue & Customs (HMRC) will decide your tax bill. Two advantages of self-employment are a decrease in the cost of national insurance and not having to pay income tax until the January following the end of your first year of trading. Record your transport, telephone, postage, office supplies, accommodation and other costs meticulously. The Inland Revenue provides forms online to help you complete your tax returns but many self-employed people use the services of an accountant to make sure that their tax payments are minimised.
Keeping accounts also makes you aware of your business costs and helps you to be sure that your charges will cover them and earn you a living. One of the greatest delights of working for yourself is that no one sets your income but yourself. With luck, the more you put into it, the better will be the rewards.
With thanks to Graduate Prospects, the Higher Education Careers Services Unit
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