Transitioning from a full-time job to self-employed is an exciting and rewarding experience. The biggest benefit of having your own business is that you call the shots. You no longer have to be at the beck and call of your employer.
However, it is essential that you are fully financially prepared. Many start-ups fail to hit the ground running as they overestimate profitability. Your business will not start making money as instantly as you take it off the ground. Since you are moving from a regular wage to an irregular income, you should carefully ensure that you have enough money to live on.
When you are switching from a full-time job to a business, you need to understand the financial shift first. A business brings responsibilities along. When you have a salaried job, your employer is responsible for your taxes and national insurance liabilities. When you are self-employed, you will have to do this all yourself. The self-employed need to make advance payments towards their next tax bill. It is essential that you have all arrangements to keep up with tax bills. Failure to meet tax obligations will attract penalties.
No matter how good your business is, you will not be able to have a steady cash inflow. You need to factor this in, so you do not struggle down the track.
Ways to financially prepare yourself for a business
Starting a business is not a cinch. It covers a lot of costs. Understand those costs so that you know how much liquidity you will constantly need.
- Initial setup costs
Types of start-up costs include:
- Business registration
First, you need to have your business registered. Tax payments cannot be processed without registration. Some businesses require licences and permits. You will have to pay fees to get the registration process completed.
- Accountancy
You will need to hire an accountant who will be responsible for maintaining accounts, bookkeeping and cash flow. They will advise you on the most optimal time for a big-ticket expense.
- Marketing
Marketing consumes a large portion of your budget. You will need to create a website, design a logo, run marketing campaigns and invest in tools to help you identify current marketing trends and reach out to your customers. Whether or not your business is making money, marketing is an ongoing expense.
Office space, employees, and office supplies
Other costs include rent for the space you buy, salaries of employees, stationery, broadband, insurance, desktops and furniture.
The setup cost could be much higher than you ever imagined.
Budget for irregular cash flow
The self-employed cannot have a steady income. Therefore, budgeting is vital. Some expenses are fixed, for instance, rent and commercial mortgage payments. Variable expenses are business travel and utility bills.
In order to create an effective budgeting strategy, you will need to have spent time trading. This will give you an idea of the average monthly income and expenses. If your business has a separate legal entity, business income and expenses will differ from personal income and expenses.
But self-employed people do not have their business as a separate entity. In this case, you often end up mixing up personal and business expenses. Try to pay yourself a fixed salary every month to cover your regular expenses, such as food, clothing, travel, and entertainment.
Your monthly pay is also a business expense. Separating your personal expenses from business ones will help you better manage your business budget.
Likewise, your personal account should be maintained separately from your business bank account, even if you are a sole proprietor. Though you can use a single account for both personal and business expenses, this will make it harder for you in the long run. Having a separate bank account will keep you on top of your business expenses.
Budgeting is essential because it helps you create an emergency corpus to meet unforeseen expenses. You can take out loans for self employed in the UK in case your emergency funds fall short of cash, but do not ignore the importance of having earmarked funds.
Finding appropriate funding
Starting a business needs a lot of funds. Undoubtedly, you are supposed to invest in your savings. Funding the 100% capital of your business with external funding sources could be challenging. There are various types of financing:
- Business loans
Business loans can be unsecured and secured. You pay interest over an agreed period, which remains fixed throughout the loan term. Interest rates for unsecured business loans will be higher than secured ones. Secured guarantor loans are subject to collateral, and hence, there is a risk of losing it if you default.
- Start-up loans
Start-up loans are similar to business loans, but they are aimed at businesses that have no trading history. These loans are more expensive than unsecured business loans, and their repayment terms do not last beyond five years.
The approval is quite tricky because you will need a business plan. Make sure that your business has the potential to make profits to boost your chances of getting a loan. You will still need a backup plan in case your business fails to survive.
- Business credit cards
Business credit cards can help you meet small, unforeseen business expenses. With a good credit score, you can qualify for lower interest rates and a high credit card limit. However, you must have a trading history.
You can also choose a line of business credit card, too. This will allow you to withdraw funds as and when you need, based on the available limit. You will pay interest only on the unpaid balance.
The final word
When you start your own business, you will have to take stock of the initial setup cost. You must have a good business idea so that you start generating profits as soon as possible. In addition, try building earmarked reserves so you do not have to excessively rely on business loans every time you come across emergencies. If you need a business loan, make sure you choose the right financing option.
