If you’ve recently joined the gig economy, you’re not alone. According to the ABS, 50,000 sole traders joined the jobs market in August. Some of you will be working full-time, whilst others will have started a side hustle to try to create some extra income.
The move makes a lot of sense if you’ve lost your job or had your hours reduced. Hustling to earn money on your own terms, in an increasingly competitive job market, can be a great option.
So, what do you need to know when setting out on your own? Here are some of the key considerations to keep in mind to ensure the move is a successful one.
Go into it with your eyes open
Working for yourself is an attractive proposition, but it’s not without its challenges. It’s best to understand these upfront so you’re not surprised down the track.
For many sole traders, working for yourself can mean more hours and less money. The promise of more flexibility may not always come to fruition. There are also often more responsibilities outside of your usual skill set including sales, finance, marketing, tax and admin.
Make sure you know what to expect, both the upsides and downsides. Talk to other sole traders, upskill in business and do your research.
Plan for success
The best way to ensure you are successful is to plan for success. Starting with a business plan is a great start and it’s always good to run the plan past someone who you trust, such as your accountant or financial planner. At a minimum, you should set targets and goals for yourself. Where do you want to be in six months, a year, three years or five years? This will prevent you from treading water and ensure you are able to track your progress along the way.
Cashflow is king!
When you’re used to receiving the same wage each fortnight or month, moving to an inconsistent income can be challenging. You will need to make provisions to account for inconsistent income by ensuring you have a sufficient cash buffer to hold you over in quieter periods, while you’re waiting to get paid and you still have outgoings to pay. Working with reputable partners who will pay on time can be the difference between success and failure for many sole traders.
Forecasting cashflow is a great way to ensure that you won’t suddenly be surprised by unexpected expenses. Your forecast should be on the conservative side and cover predicted income, expenses and costs like tax or public liability cover. Create a budget which covers all expenses. Seeing it all laid out over a 12-month period will give you a better understanding of what your expenses are likely to be. Then you can work backwards from there to understand what sort of cash buffer you and your business will need to survive.
Consider your tax effectiveness
As a sole trader, you don’t pay company tax; any income you bring in through your business is subject to income tax. Talk to your accountant about how you can keep tax to a minimum and whether it might make sense to change to a company structure to become more tax efficient. Your accountant can also let you know about any allowances or deductions you might be eligible for such as the instant asset write-off.
Understand your super obligations
As a sole trader, you’re not obliged to make super guarantee payments for yourself. However, before you simply forego paying super, get advice on how this may impact your long-term wealth strategy. Ideally, you should make plans to start contributing to superannuation as soon as cashflow allows.
David Hancock, Director, Montara Wealth