Cash flow management for sole traders

In business, good cash flow management is critical to success. When you are a sole trader, poor cash flow management can land you in trouble quickly. It’s stressful and can bring creditors knocking at your door demanding payment.

At Teamwork Accounting we want to equip sole traders with the tools and insights to effectively manage their business cash flow.

In this guide we will cover some common questions and help you get your cash flow management on track.

How to manage finances as a sole trader

Managing finances as a sole trader can start with separating your business bank account from your personal bank account. This helps in more ways than one.

Although you’re not required to open a business bank account, keeping your private and business transactions separate will save you both money and time. It helps with cash flow management because it’s easier to see your cash on hand when it’s in a separate business account.

Doing bookkeeping, preparing financial documents, BAS, and tax returns is also much easier. You don’t have to sift through your bank account to figure out which transactions were for business use or personal. 

What are three cash management strategies?

There are many strategies to manage cash flow. Here’s 3 good ones.

  1. Know your financial position.
    Use financial data to forecast your cash flow. Forecasting helps you know where you are going. The use of accurate financial historical data is important when setting those targets and forecasts.
  2. Choose the right technology (cloud accounting software) to streamline your operations.
    When your books are a mess it’s hard to know what’s happening with cash movements. You can streamline your business with accounting technology. Accurately upload and store receipts on the go, automate invoicing and reminders, and get real-time visibility of your financial position. Technology is an obvious choice for anyone wanting to improve their cash flow management.
  3. Stay on top of debtors.
    You need cash on hand to have a positive cash flow. Notify your clients of your payment terms upfront. Make sure they know how much they will be paying and when and how you expect to receive that payment. Invoice clients at the earliest opportunity. Stay on top of payments that are due and send customers reminders to make payments.  This will help keep your cash balance in check and your bank account smiling. And again, you can do all of this with technology and the services of a good bookkeeper.

How can a sole trader increase cash flow?

There are several ways to increase your cash flow.

  1. Creditors Management:
    Pay your suppliers when the payment is due. Don’t put your cash flow under pressure by making payments before they are due unless the supplier offers an early settlement discount. In the same vein, don’t delay paying your creditors and incur unnecessary penalties.
  1. Stock Control:
    If your business is heavily reliant on inventory (like a food retailer or restaurant, for example), this is one area that eats up a large portion of your cash flow. You need to keep it under tight control. Ensure that you do regular stock takes and keep your records up to date. Don’t carry unnecessary stock on hand. Order more frequently to avoid additional storage costs or stock loss. Run promotions or think of creative ways to move stock that isn’t moving or in excess. Don’t forget to take into consideration seasonal demands.
  1. Outsource:
    Sole traders often feel obligated to fill every single role within their business. That leaves you stretched and can lead to a slow-down in activities that actually generate your cash flow.  There are many aspects in a business that can easily be outsourced to improve your processes and free up your time.

    One key area where a lot of small business owners in Melbourne lose time is doing their own books. Besides being time consuming, if you’re not a professional you’re likely to make mistakes and miss out on ways to save money. Take a look at how we help small businesses in Melbourne with our bookkeeping and accounting services.

How to pay yourself as a sole trader australia

Paying yourself is often one of the biggest business challenges for a sole trader in Australia. 

You work hard and deserve to be rewarded. You need to be able to pay your living expenses, household needs and feel like you are benefiting from all your efforts. You have to manage cash flow well if you want to pay yourself a decent return. 

Good cash flow planning and forecasting will help you pay yourself. Instead of waiting to see what’s left over each month, plan ahead and allocate an amount that you’d like to pay yourself as a sole trader.

At the same time, you want to keep a healthy cash balance in the business to help you through those rainy days or to purchase new assets. And don’t forget, there’s alway cash needed for BAS and income tax. If you are not good at managing your cash flow, we suggest that you open up a separate bank account for tax and transfer an amount weekly into that account to cover your BAS and income tax payments when due.

The Ultimate Guide To A Sole Trader Business

For more on topics related to sole traders, take a look at our ultimate guide here. In it we cover business structures, tax, running a sole trader and more.

If you’d like more information about our services or how we can help you with cash flow management in your sole trader business in Point Cook, Werribee, Hoppers Crossing and surrounds, reach out to us.

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