Operating your small business as a sole trader is a very common way to structure your business as it is very easy to set up and the ongoing administration costs are also lower than with other structures. However, there can be some traps that are often overlooked when you first decide to step out on your own. Here are six tips for surviving as a sole trader.
1 Open a separate bank account
A sole trader is not legally required to operate their business from a separate bank account, but best practice requires it! Using a separate bank account will make record keeping much easier and can also be used to link bank feeds to your online accounting software, such as quickbooks online.
2 Watch your cash flow
Understand the difference between cash flow and profit. Many businesses can operate short term at a loss, but they cannot operate without cash. Ideally you should establish a working capital balance that will be able to cover short term expenses in times when sales or revenue is lower than expected.
3 Pay yourself a ‘wage’
Even though you are not an employee of your business, it helps if you pay yourself a set ‘wage’ each week rather than taking cash on an adhoc basis. This will also help with cash flow management and future budgeting.
4 Use your contacts
Have a wide circle of contacts and networks around you. These may be other small business from a similar industry or could be businesses from around your physical location. You can use these contacts and peers for support when you face various challenges in your business.
5 Have insurance
Being a sole trader means you are personally liable for business debts. For this reason it is very important to have appropriate insurance whether that is professional indemnity, business insurance or public liability.
6 Don’t forget about superannuation
Superannuation is often overlooked and forgotten about by sole traders, however it is very important to plan for this and to put aside an appropriate amount. Another great advantage of paying superannuation is that amounts up to $25,000 is tax deductible.