There’s no doubt that solopreneurship is on the rise. Solopreneurs are, of course, entrepreneurs, but because they’re often the only ones with real skin in the game, their money situation is typically unique.
While there are lots of resources for managing small business finances, managing your money as a solopreneur has its own set of considerations. It’s particularly important that solopreneurs delineate between their personal finances and their business’ revenue.
Moreover, solopreneurs don’t have designated team members to who they can delegate the “business side” of their business. This means that managing a business’ finances, on top of all other duties, falls squarely in their laps.
Managing your money as a solopreneur may be tricky but it’s far from impossible. We’ve put together a list of 5 tips to help you get on top of your money.
Tip #1: Separate Your Personal Bank Account from Your Business
Banks, of course, are a key partner when it comes to managing your business’ finances. If you’re not already leveraging an online banking partner, it’s worth looking into. Even if you’re working from home, you can have direct access to your bank account, meaning you always have a line of sight into your business and expenses.
That being said, we strongly recommend separating your personal bank account from your business’ bank account. Separating these transaction types will be crucial when it comes to tax time. You’ll need to quickly and easily understand what expenses need to be reported, which can become unnecessarily difficult when your personal spending is mixed with your business’ expenses.
If you’re going to have multiple bank accounts, consider a mobile bank account without fees. Separate and secure your personal finances from your business’, without paying to access your own money.
Tip #2: Track Your Expenses
Personal finance experts always tout the importance of budgeting, but this advice applies to solopreneurs too. Tracking your expenses is essential to understanding your profit margins and cash flow. But for a lot of solopreneurs, this task can feel like housekeeping and easily fall to the wayside.
As Spencer Barclay, CEO and Founder of Savology puts it, “Far too many solopreneurs will set up a spreadsheet to track their expenses, but then once they get involved in the daily grind, they end up never using it. The end result is that they have no idea where their money is going, which can lead to overspending or cause them to miss crucial deductions at tax time.”
But tracking your expenses doesn’t have to be a manual process. Take advantage of budgeting apps (like Mint) to automate tracking your cash flow. Instead of having to constantly update your budget on a spreadsheet or on paper, utilize an app that will give you a bird’s eye view of how money is flowing in and out of your business.
Of course, using an automated solution for budgeting is much more straightforward when you have a dedicated bank account for your business. But regardless of your set up, it’s essential to understand money coming in and money going out.
Tip #3: It’s Always the Right Time to Prepare for Tax Season
As a solopreneur, preparing for tax season will need to become a part of your routine. In particular, making sure you’re ready to report your expenses will be key to filing in time for the tax deadline.
Staying on top of your expenses puts you in a great position to take advantage of itemized tax deductions. Receipts for expenses such as business lunches or office purchases need to be kept and carefully stored so that they may be submitted as proof for these deductions. Digital files are typically easier to store and export, and services like Shoeboxed will help you scan, digitize, and organize your receipts.
Pssst… check out our guide to organizing your receipts for taxes (and maximizing your deductions).
On top of making sure you’re fully prepared to report your expenses (with proof), you’ll also want to start saving for the possibility of owing taxes. FinancialBin recommends putting 20-30% of your earnings into a short-term savings account to cover state taxes, local income taxes, and self-employment taxes.
Tip #4: Save For a Rainy Day
The importance of saving up for a rainy day cannot be overstated. Both in your personal and business life, having money put aside for situations where money could be tight is crucial for staying afloat. Did you know only 40% of Americans have enough money put aside for a $1,000 emergency?
We recommend setting up two types of funds: an unexpected emergency fund and a sinking fund. With an unexpected emergency fund, it’s generally recommended that you have enough money saved for a situation in which your business is operating at a major loss for 6 months.
A good way to prepare for this is to calculate your business expenses by month. If your business costs $1,000 a month to run, you should have at least $6,000 put aside to fund the business in a situation where it was earning $0 a month. It may not be fun to think about the possibility of needing to tap into your emergency fund, but it’s best to prepare for the worst.
With a sinking fund, you’re not preparing for an unexpected loss. Instead, you’re putting money aside for any future liabilities on wasting assets—like items that need to be replaced every few years. While these types of liabilities are technically predictable, they’re not always top of mind.
Unlike an emergency fund, with a sinking fund you’re putting money away that you know you’re going to have to spend within the next few years.
When used in conjunction, an emergency fund and a sinking fund will help prevent your business’ budget from falling apart and can also help you avoid needing to take out loans and go into debt. A sinking fund also prevents you from using your emergency fund on sinking costs, and vice versa.
Tip #5: Diversify Your Revenue Streams
For many people, solopreneurship started as, or still is, a side project used to earn extra money while working full-time. The “side hustle” is an example of diversified cash flow, or having multiple sources of income. If one of these sources of income were to drop out, people with side hustles would still be able to continue making money.
Just like you can create a diverse portfolio of income for your personal life, you should try to diversify the revenue streams for your company to hedge your bets. This will help your company stay afloat in case one of your revenue streams is no longer earning money or starts operating at a loss.
For example, let’s say you run a career coaching business. Your primary “product” is client sessions. However, if you want to start adding new sources of revenue, you might think about creating content that only paying members can access. Or you can sell DIY workbooks to people who want to work with you but can’t afford weekly sessions.
Launching new products isn’t the only way to diversify your revenue streams. We love this example: making your website/business more accessible. Making your business accessible is not only the right (and often legally required) thing to do, it opens up new customer segments who may have previously not been able to use your services.
However you choose to diversify your revenue streams, finding new ways for your business to make money is never a bad idea.
Overall, managing your finances as a solopreneur is easier said than done, but that doesn’t mean you’re completely on your own. We hope these tips help you realize that not only is technology your friend in this fight but also that a little forward thinking about what could be around the bend for your business can go a long way.