Thinking about growing – or even launching – a sole trader business? Awesome! We’re here to cheer you on every step of the way.
With that in mind, we’ve put together this quick guide on the basics of business finance. Think of it like a cheat sheet that’ll get you up and running in no time, ready to take on the world.
First, a great starting point on your journey to financial success is creating a budget. This will help you stay on top of what you’re planning to earn and spend.
Next, you’ll want to get a handle on cash flow, which means keeping track of when money is coming into your business, and when you need to spend it. The goal is to always have funds available when you need to cover an expense.
It’s also a good idea to set aside some savings for quieter periods or emergencies. Calculating how much you might need, and putting money aside for a rainy day, will help your business stay afloat in stormy weather (both metaphorical and literal).
Finally, if after implementing these strategies, you see your profits start to roll in – brilliant! If not, don’t worry, there’s always room for some fine-tuning. We cover it all in this article. Let’s dive in!
1. Begin with a budget
Very simply, a budget is a plan stating how you intend to earn and spend your money. It’s important because it provides you with a clear overview of your financial situation, allowing you to make informed decisions and adjustments as needed.
For example, if you tend to bring in extra income over the Christmas period, you could plan to purchase extra equipment that’ll help increase earnings during slower months. By knowing what resources you have and how you’re using them, you can steer your business towards your goals with confidence.
📖 For a full breakdown on how to create a budget, check out our detailed guide to budgeting.
Business vs. Personal budgets
It’s not all about your business – you can budget for your personal life too!
While in theory you can combine a business budget and a personal budget into one (after all, as a sole trader, your business’ finances are your finances), it’s generally easier to think of them as separate things:
Business budget
A business budget outlines the money you plan to spend to keep your business running smoothly. It’s essential for achieving your business goals by making sure you have enough funds set aside to cover all costs. This may include:
Overheads: Regular indirect expenses like office rent, utility bills, and essential software subscriptions.
Cost of goods sold: Supplies and production costs.
Marketing and growth: Resources for marketing campaigns, or to finance new products or services.
What you pay yourself: How much of your business earnings do you need to cover personal costs?
A budget helps you keep an eye on your spending, so you’re ready to adjust as your business evolves. If a new product launch is on the horizon, for example, you might need more cash on hand to get things started. At this point, you can change up your budget accordingly.
Personal budget
A personal budget helps you manage the cost of everyday life. Make sure to cover:
Basics: Essentials like your rent or mortgage, electric and gas bills, groceries etc.
Savings and investments: It’s generally useful to allocate funds for future security, such as an emergency reserve or investments that offer growth potential over time (stay tuned for more on this later).
Fun money: Reserve some funds for the things that add joy to your life – from that morning matcha latte to the weekend away by the sea.
🙋♀️ Remember – you’ve also got to set aside enough to pay your taxes. Or you could make it super simple, and just use Hnry – we sort it all for you, so you don’t even have to think about it.
Balancing the budgets
Finding the right balance between your personal budget and your business budget is all about your personal priorities.
If you’re growing your business, this might mean a little less “take-home pay” for a while. In contrast, if you’re growing your family (congratulations!), you might opt to temporarily scale back what you spend on your business.
In any case, it’s recommended that you:
- Regularly check in with your incomings and outgoings
- Adjust your budget on the fly (if needed)
- Make sure you’re covering both immediate needs and long-term growth
- Build a cushion for surprise expenses
Consider your budget a trusty map leading you to success, helping you navigate around potential roadblocks.
📖 For a more detailed look on how to balance a budget, check out our article on budgeting.
🙋 Struggling to set money aside? Hnry can make budgeting easier by automatically allocating your money to different accounts.
2. Map out your cash flow
Running a business isn’t just about keeping tabs on expenses – you’ll need to make sure there’s money actually available when it’s time to spend. That’s where cash flow comes in!
Cash flow is essentially about when money moves in and out of your business. Imagine cash flow as a snapshot of your bank account at any given moment, capturing when money enters and exits – not just when you send out or receive an invoice.
Staying cash flow positive is the goal. This means having enough cash on hand to cover every bill and expense that comes your way. Falling into cash flow negative territory means you don’t have enough money in your bank account to pay bills as they’re due, which is less than ideal!
Managing cash flow can sound daunting, but it’s all part of running a healthy business. You can start with a cash flow statement, which is essentially a record of money flowing in and out over a designated period, such as a month.
Then, you can create a cash flow forecast, which takes note of when in the future you have bills due, and when you’ll be paid. Ideally, this forecast should predict your future cash situation, helping spot potential shortfalls and letting you plan for big expenses.
📖 Learn more in our comprehensive guide to cash flow, including how to create both a cash flow statement and a cash flow forecast. Sorted!
3. Savings and investments
Savings
Setting aside money in case of an emergency can be a lifesaver if things head south.
As a sole trader, you’re in charge of covering life’s ups and downs – including if you fall ill, if a client stops needing your services, or even if you need some time off work to rethink business strategy. That’s what an emergency fund is for: to give you breathing room when you need it.
With rising inflation affecting the cost of fuel, supplies, and services, sole traders have definitely been feeling the pinch. Extra funds on hand can help tide you over if you find yourself short during quieter months.
The bright side? Hnry makes saving sooo much easier. Our Allocations feature lets you earmark portions of your income to funnel into different accounts every time you’re paid. You choose where your money flows, making it quick, easy, and automatic!
Investments
Investing is a way to grow your money – but while your investments (hopefully) grow, they generally shouldn’t be touched. This means money you’ve invested is usually less accessible than money you’ve set aside as savings.
Investing in a private pension can be a good way to save for retirement. As a sole trader, contributing to a private pension isn’t automatic the way it is for employees, but making voluntary contributions can pave the way for a more comfortable retirement. Plus, there are a few potential tax benefits that you may be eligible for!
Other investment paths include things like stocks and shares, ETFs, property, or cryptocurrency. Each comes with its own set of risks, so it’s crucial to research thoroughly and only invest what you’re comfortable with potentially losing. And remember, each investment type comes with unique tax implications.
4. Calculating profit
Now comes the exciting bit – let’s talk profit!
Without getting too complicated, there are actually three main types of profit that could be useful for you to understand. Each is calculated slightly differently, and measures a different aspect of your business:
1. Gross profit
Think of this as your business’s raw earnings. Start with all your revenue from business activities, then subtract the costs directly tied to creating your products or services, known as the cost of goods sold (COGS).
2. Operating profit
Operating profit is your business revenue, minus both COGS and all the costs associated with keeping your business running (also known as overheads). Think rent, utilities, internet, equipment purchases, and motor vehicle expenses.
This figure is calculated before tax and interest come into play, which is why it’s also known as EBIT (Earnings Before Interest and Tax). It helps you see how well your business is performing without factoring tax and interest rates, which can be variable.
3. Net profit
This is the grand total you’re left with after you’ve accounted for taxes and interest as well. Think of net profit as your business’s “take-home pay.”
So which profit calculation should you use to gauge your business’s growth? It really depends on what insights you’re after and your future plans. Are you aiming to boost your earnings and expand your business? Looking to launch a new product or service? Or just want reassurance that your business earnings can provide you with a comfortable lifestyle?
💡 Don’t forget about taxes! It’s tempting to get swept away by profit figures, but remember to factor in your tax obligations.
Once you’re clear on the profit metrics that matter to you, it’s time to fine-tune your business for better profitability. Could you offer your products or services at a lower cost to get more sales, or conversely, up your prices for premium clients? Save by purchasing supplies in bulk? Perhaps bundle offerings together to drive up sales or profit margins? Are you claiming all the business expenses you’re eligible to claim?
📖 For more on measuring and growing your profit as a sole trader, check out our in-depth guide.
Hnry is here to help
No matter your goal – whether it’s boosting your income or expanding your business – Hnry’s here to lend a hand and help you get on top of your financial admin. As an award-winning accounting service, we make the taxing (ha!) aspects of being a sole trader a breeze.
For just 1% +VAT of your self-employed income, capped at £600 +VAT a year, we sort all your taxes, levies, and whatnots for you. That includes:
- Income Tax
- National Insurance contributions
- Student loan repayments
- Private pension contributions (optional)
- VAT (if applicable)
We also file your Self Assessment, or quarterly updates for MTD, whenever they’re due. It’s all part of the service! Plus, we manage your expenses for you, and pass on any tax savings you’re eligible for in real time. No more waiting until the end of the financial year for tax relief.