When switching from PAYE to self-employment, it is very tempting to beleive we have shuffled off the coil of living on a fixed income, and this is true to a point. It is true that as self employed people there is no limit to what we can earn, we have agreed no maximum salary, and along as we can sell more than we can spend, we have an income.

But how much income? As PAYE people, we knew exactly how much income. We got a paycheck that said, this how much we agreed to pay you, this is how much your government wants, and look here, this is how much you get to keep and spend on whatever you want and we are not going to ask for it back later.

Not so for the self employed. We get to collect money that is NOT OURS all day long. People give us money such as VAT, that rightly belongs to the government, ask us mind it for awhile, and then hand it over a few months later, just as we are getting used to it. Did you ever take in a lost puppy, and while waiting for the owners to come, forget that the cute little fluffy fella does not belong to you? You took it for walks, out to dinner, maybe even on holidays. You might have even give it to others to enjoy, like suppliers or employees.

But sooner or later the real owner comes back, taking the puppy and leaving behind with heartache. You have grown far too attached to something that wasn’t yours, and now you have to pay.

So what’s the alternative? How, as self employed people, can we learn to keep a respectful distance from that which is not ours? How do we stop using our business like a credit card at an ATM machine? How much of our profit are we entitled to pocket?

It comes from being aware at all times how much money in the business represents our own puppy, and how much has to be returned to its rightful owner. And how do we do that? First of all by understanding that as self employed people, our business profits are equivalent to our old PAYE gross salary, and keeping an eye on its progress weekly or at the very least monthly. Knowing your profit allows you to work out how much money in your business belongs to you, using the tool I am about to share with you.

For example, we are three months into the year now. Let’s say our profit (sales minus business expenses) to date is 20,000 euros. To project what it will be for the year, I am going to divide by 3 months and multiply by 12 months. That gives me a probable 80,000 profit by year end. To see how much of that is mine, I can use the following tool. The tool tells me that on 80,000 profit, 35% of it will go on PAYE and PRSI. So for every 650 I take out of the business for myself, I better have an extra 350 ready to pay the tax.

I can easily sanity check whether I taken only my money out of the business so far this year, or whether I have dipped into Other Peoples Money. For my 20,000 profit, 13,000 is my puppy. If I have taken more than that so far this year, I need to be aware that I need to take less later, OR sell more! I do need to be aware that if I sell more and my profit increases, my tax percentage will also increase, so I need to go back to the tool to check on this.

 Where’s the tool? It’s right here, please give it a go, any questions just ask!

This is not about creating a cashflow report for funding, its for analysing your current cashflow situation and rejigging things to make it work better.

Spread out your fixed payments
With cashflow, timing is everything. The smart entrepreneur knows this and records the dates when fixed bills are due to come out. Then he/she looks at the cashflow report. Everything hitting on the first of the month? We can’t have that. Make a few calls and change around payment dates so that they are spread out more evenly. Rent on the 1st, credit card on the 15th, subscriptions on the 23rd, etc. How does that help? Well, when you can’t pay your bills, its often a result of a knock on effect of someone not paying YOU. It’s a lot easier to call one or two customers to get money in for a 1,000 euro bill than to have to ring ten customers because 4,000 is hitting all at once. With one or two customers, you have time to make nicey pie, perhaps arrange a new business meeting, ask about the kids, etc. If your mind is on the next nine customers you have to ring, your desperation will come through and they’ll be off the phone quicker than you can say bankruptcy.  Be honest. Let them know you have a bill for X coming in, and if they could just tend to your invoice you would be most grateful and be able to stay in business and continue to provide your stellar product/service.

Get back on bi-monthly VAT Returns
The Revenue kindly switched some of us to six monthly VAT to ‘reduce our administrative burden’ but instead caused a cashflow nightmare. Whatever hope you had of calling round to collect money every two months for a reasonably sized VAT bill, a six month build up can reduce a grown man to tears. You do not have to stay on six months, call them up and say thanks, but no thanks please put me back on to two month returns.

Maximise your available credit
Time your purchases to get maximum credit. If you have 30 days credit with your supplier, try to buy at the beginning of your credit card cycle, to stretch that out to 60 days. If you find  that’s still not enough, transfer your balance to a zero balance transfer card. But set an alarm in your phone/google calendar  so you don’t go beyond the promotional period and end up with a whopping interest bill.

Arrange for part payment plans for both customers and suppliers.
Your customers probably have as messed up cashflow as you do. If you have some very overdue bills how about throwing both of you a lifeline, for example, “Ok Joe, how about you pay me 500 off your bill for now, just to tide me over?” They will very likely be most grateful, and you get 500 to pass onto to your supplier as they say, in good faith. I believe that everybody wants to pay their bills. Don’t you want to pay yours? Part payment arrangments make it more manageable, and keep the money circulating.

Make sure you have a system can handle part payments.
Yes, payment plans are a key cashflow strategy, however, if your backoffice system can’t handle this easily, part payments can be a nightmare to track. “Hi, this is Joe, I want to pay off a little more of that old invoice, what’s left over again?” Don’t be caught saying,”ah, hang on I’ll get back to you on that”. Joe’s largesse will be fairly shortlived, and you will be waiting until  his next ship comes in, which might be a long way from shore. Most accounts systems can handle this, as can SortMyBooks, but if you have been relying on Word for invoicing and spreadsheets for VAT, it’s probably time to trade up.

Finance Options
If you discover that you honestly have more going out than coming in, rather than just a cashflow issue, in kinder times I would have suggested do a term loan refinance with your bank, right now I am not exactly sure how feasible that is. I still have faith in the credit unions though, and if you dont have an account there, get one. Even if you only put in a little, once you are a member, loans are still given based on repayment capacity.

And as usual, a tool to help. Plot out your cashflow for the next six weeks and see if your problem is income or just cashflow and see where you can even it out.

If this has started to make you think about your finances in general, check out this post also: http://short.ie/salesproj