Money Management Tips For Contractors

These money management techniques can help contractors and small business owners keep control of their finances through the good times and the bad in their trading.

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Running a business isn't easy. It's estimated that 1 in 5 small businesses fail in their first 2 years, and just 25% of new business ventures survive for a decade. One of the biggest challenges small businesses face is managing their cash flow. Even businesses that have a good reputation and a steady flow of customers can find themselves struggling if they encounter a sudden unexpected expense or a major client fails to pay them. Money management skills are essential for all business owners.

In this guide, we cover some key money management topics, including budgeting, saving, and bank accounts. We also look at how to prepare for tax season so paying that dreaded tax bill isn't too painful to your business finances. If you put these systems in place, you should find your business's finances become easier to manage in the long term.

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Manage Your Budget Carefully

If you don't know what you're spending money on or how much income you can expect in the next few months, you can't make intelligent decisions about the future of your business. Making a budget is the first step toward taking control of your finances.

Make a list of your fixed income and expenditures. It should cover:

  • Any regular, predictable income
  • The amount of money you need to take to cover essential personal expenses
  • Fixed expenditures such as utilities, equipment rental, etc.
  • Staff costs, if appropriate
  • Estimated costs for materials, transport, and other job-related expenditures
  • Contributions to savings funds
  • Contributions toward annual tax payments

Many budgeting tools allow users to categorize expenses so they can be classified as discretionary or essential. Savings pots can also be labeled so you can tell at a glance how much money you have and what it's reserved for. If you're ever in a position where you need to draw on some savings to replace a piece of equipment or make payroll for a month, you'll know exactly where you stand.

Choosing Budgeting Software For Contractors

If you're a sole proprietor with a relatively small contracting business, you may be able to manage your budget with a simple spreadsheet. If you're dealing with larger projects that require you to buy materials or you have staff who need to be paid on a regular basis, more sophisticated budgeting tools may be useful.

There are many accounting tools designed for small businesses. Sage 50 and Xero both offer inexpensive and versatile cloud-hosted solutions for small business owners looking to better manage their finances. Another option is to look at software specifically designed for contractors.

Those in the construction industry may find tools such as Archdesk or ProjectSight invaluable. These tools help construction contractors estimate the cost of their jobs and can be combined with other accounting tools to get a detailed overview of your finances. They also offer other project management features that may be useful for those who are taking on larger and more complex contracts.

Have A Dedicated Business Account

Many sole proprietors try to run their businesses through their personal bank accounts. This is less than ideal for several reasons:

  • You may be breaching the terms and conditions of your personal bank account.
  • It makes budgeting much more complicated.
  • Identifying business expenses is more difficult.
  • It makes doing your taxes more complicated.

Set up a business account as soon as possible to keep your personal and business finances separate. If you use credit cards for the business, make sure these are kept separate from your personal borrowing.

Be sure to document all income and outgoings to do with the business. If you ever need to subsidize the business with your own funds, keep records of this. The personal funds you put into the business can be treated as a loan to be repaid. Your accountant can give you advice on how to handle the loan for tax purposes. Many banks offer business banking free for the first year, with tiered pricing thereafter based on how much you use the account. This allows you to get started with business banking without having to spend a lot of money. 

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Set Money Aside For Saving

Once you've worked out your income and expenditures, you'll have a good idea of how much money you can expect to have left over each month. Set aside some of that money for saving. This tip applies both to your personal budget and your business budget. 

It's a good idea to invest some of your excess income into building your brand and growing your business. This could be through marketing, spending money on training courses, investing money in better tools, or even hiring staff to take on certain parts of your work. However, diverting some of your income to a savings account means you'll have a safety net should you ever have unexpected expenses or a period of time where you can't work.

If you find saving money a challenge, try setting up an automatic transfer to a savings account. Some bank accounts offer an automated "round up" feature that will round up transactions to the nearest whole dollar and move the excess into a savings account, which can be an effective way of saving small amounts. Setting up a bigger transfer of a fixed amount of money each week or month may help you build an emergency fund.

Ideally, you want to have at least 6 months of living expenses in an easily accessible form as an emergency fund for yourself and your family. Your business should have a similar amount to cover fixed overheads too. When you're just getting started in business, that could seem like an impossible goal. But start saving even a small amount today and it will add up. 

Cutting Costs Helps You Save

If you don't have any real "excess" income, look for ways to spend less. Cancel any unnecessary subscriptions and reduce money wasted on discretionary purchases. Try to negotiate with vendors, too. If you're regularly buying a specific product, is there any way you could buy it in bulk to save money? 

Take advantage of price comparison tools, and set reminders to shop around for better deals on any regular expenses you have such as insurance or telecom packages. Often, companies offer incentives to bring new customers over to their brands, so switching providers every couple of years could cut your costs significantly. Revisit your marketing efforts, too. Are you getting a good return on investment from those local newspaper ads? Would you be better off focusing on marketing via the Craftjack Pro app? Make sure every dollar you're spending on your business is making you more in return.

Use Home Budgeting Software

As a contractor, you don't just have your business expenses to think about. You'll also need to manage your own finances. Those who work in highly seasonal industries such as landscape gardening may need to plan ahead to ensure their personal finances are still in good shape during the off-season.

Just as your business needs a budget, your household needs one too. Look back through your last year's expenditures, taking into account holidays abroad, birthdays and any festive or religious celebrations you observe. Work out how much you need to pay yourself each month to ensure you can cover your regular outgoings comfortably. Build that expense into your business's budget so you know exactly where you stand financially and don't have to worry about yourself or your business running out of money during the off-season.

Today, many banks offer budgeting tools built into their apps. These tools can help you see how much you've spent each week or month and how that expenditure compares to previous periods. If you want something more sophisticated than this, take a look at You Need A Budget. This tool works on the principle of "giving every dollar a job," and many people find it helps them change how they think about money, making it easier to plan and save.

Plan Ahead For Your Taxes

Few people enjoy dealing with their taxes, but it's an essential part of doing business. As a contractor, you do need to pay taxes on your income. The exact way your taxes are calculated depends on whether you're doing business as a sole proprietor, you're in a partnership, or you have some kind of company set up.

Hiring an accountant to advise you on your tax situation and help you set up a systematic form of record keeping is money well spent for most businesses. A tax professional can help you understand your financial situation and give you advice on expenses and tax deductions. They may also be able to give you advice about what sort of company structure would save you the most money in taxes in the long term. They can also advise on issues such as benefits in kind and tax rebates or environmental initiatives that you may not be aware of as a layperson.

If you've followed the tips so far, you'll have an idea of your income and expenditures. You can use this to work out roughly how much tax you need to pay. Most self-employed individuals are expected to file an annual return and pay tax quarterly. Aim to set aside some money every month to cover that quarterly tax bill, and try to predict your taxes as accurately as possible.

Keep in mind that if you're getting a tax refund at the end of the financial year, it's because you've overpaid your taxes. The tax refund isn't free money. By estimating your taxes more accurately and paying roughly what you need to each quarter, you'll be able to keep more money in your bank account, earning interest.

Money Management Matters

Employing the above strategies can help you keep your business afloat through the quieter times of the year and reduce the impact of any unexpected expenses. Good planning and record keeping don't have to cost a lot of money to implement but can greatly reduce the financial stress you're faced with and even save you money in the long term.

If you're not sure where to start, look at separating your business and personal bank accounts. Invest some time into learning how to use bookkeeping and accounting software and work out where your money goes in a typical month. If you're like many other small business owners who find themselves going through a cycle of "feast and famine," getting into the habit of sticking to a budget might be difficult at first, but after a few months, you'll see the benefits and your business will be in a much stronger position for it.