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Small business budgeting for the self-employed

Cracking the Cashflow Challenge: How to Budget When You’re Self-employed

Whether you’re newly self-employed or an old hand at working for yourself, keeping constant track of your finances is essential. Establishing a budget makes good business sense. As part of this, having access to an at-a-glance tool that takes into account all of your incomings and outgoings is vital. 

For the self-employed, a budget is one of the most important management tools for your own business. It helps you: 

  • ensure you meet day-to-day commitments
  • plan for likely cashflow surpluses or shortages 
  • set important financial goals and benchmarks 
  • make informed decisions about unexpected additional expenditure
  • prove to your bank that you are managing cashflow

If you’re not sure where to start, this article sets out some handy hints to help you draw up – and stick to – a budget that works for you, whatever your current and future financial circumstances. 

1. Embrace irregular payment 

Embarking on a self-employment journey can be exciting – but also riddled with anxiety. Not knowing exactly when your invoices will be settled potentially leaves holes in your budget. 

This is something you will eventually become used to and less concerned about, but is another reason why budgeting if you’re self-employed is so important. Recording transactions, and having the right tools in place to help you do so, is vital. 

When it comes to creating, sending and following up on invoices, do you feel a bit lost or not sure where to start? Check out our detailed invoicing guide for the self-employed for all the answers.

2. How much do you need? 

The simplest starting point when drawing up a budget for your self-employed lifestyle is by calculating average outgoings across a month – or week by week if that’s more appropriate for your situation.

Review your expenditure across several recent months to give yourself a good idea of how much income you require as a monthly average. Remember to include all of your household bills and direct debits/standing orders as you work this out, to avoid nasty surprises as far as you can.

3. How much will you earn? 

You should set your budget based on an estimate that reflects your lowest expected monthly income. The benefit of calculating required income this way is that, if work goes well, you’ll see this figure start to increase – which is a great motivator in itself.

If this is your first time working on commission or living on an irregular income, estimate what your lowest-income month would look like based on what you would reasonably expect as your minimum earnings for the next few months. Once you have both this figure and your estimated expenditure (see step 2), you’ll be in a position to budget properly, and pay yourself the right amount while also building your company’s funds.

4. Remember to factor in tax 

Regardless of how you have set up your self-employment status, you will also need to remember to regularly put aside money to pay tax bills that will eventually come your way. If you’ve been used to payroll-based employment this aspect of self-employed budgets is easy to overlook. 

While working for yourself does bring some tax options and benefits, you will need to consider income tax, National Insurance contributions, and possibly Corporation Tax and Value-added Tax (VAT). Leaving around a third of your income to one side usually sees you right. The best place to seek more support is the UK government website which explains it all in detail. 

5. Don’t let rainy days get you down

While making any sort of saving can be tricky in this day and age, it’s imperative to try to anticipate unforeseen issues that could come along. This includes anything from fixing your car to other unexpected (and potentially uninsured) domestic disasters, like leaks. Setting aside anything you can, perhaps a proportion of disposable income otherwise spent on entertainment, will help when a rainy day arrives. 

Flexibility is the key to successful budgeting when you’re self-employedThis means remembering to regularly review and adjust your budget as you get paid. If your income ends up being higher than you planned, make sure you add it to your budget; if a month (or other chosen period) is less fruitful, you might need to tighten your budgetary belt for a while. 

6. It’s on the business 

Claiming back certain expenses through your business is one advantage of self-employment. This includes the ability to pay part of your household utility bills – for example, the electricity you’re using and broadband access – from your business to your personal account. 

This is key because, during the COVID-19 pandemic, more of us have been working from home. For more information, check out this UK government advice on related tax relief. 

You’ll doubtless have heard the term “financial wellbeing” in recent times. It’s a hot topic that means being financially organised, so you can relax about budgets and get on with work and living, safe in the knowledge your money is in good shape and you’re prepared for a sudden need for cash. 

Cashflow Manager is on hand to support your self-employed budgeting requirements by making the task simpler, and displaying your income and expenditure at the touch of a button. 

Using our accounting software packageCashflow Manager means budgeting if you’re self-employed or a sole trader is much easier. 

The tool allows you to create a budget quickly and easily – with zero accounting experience needed. Try our free, no-obligation30-day trial today (no credit card required). 

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