How to manage money when you are self employed

When working on your business’ financial plan, don’t forget to develop a method for managing your new personal financial situation. Unfortunately, statistics show that many home-based businesses fail often due to poor financial planning. Fortunately, there are ways to make small business ownership work for you. Here’s how:

Don't underestimate your expenses. Fortunately, more than 40 percent of all home-based businesses require less than $5,000 for startup. However, there are many other costs associated with running a business. In your spending plan, don’t forget expenses such as child care, insurance, postage, gas, and dry cleaning.

Learn how to manage your income. Most self-employed workers have sporadic incomes. If your income varies from month-to-month, determine your average monthly income. Then, if you have a month where you earn more than average, put the extra amount into a savings fund to supplement less lucrative months.

Avoid relying on credit cards. If you need to use a credit card for business expenses, open an account specifically for that purpose. If you need money to launch your business, consider a small business loan instead.

Keep tabs on your taxes. Some self-employed individuals may have to pay self-employment tax in addition to their regular income taxes. To avoid tax-time surprises, periodically review your taxes throughout the year. Don’t forget to make necessary quarterly tax payments to avoid under-withholding penalties.

Maintain accurate records. Complete all of your paperwork on-time, particularly if you are billing clients or customers. Many companies will take several weeks to process invoices. Keep copies of all receipts for tax time.

Finally, don’t hesitate to get help. Consider working with a lawyer who can help you with necessary, and sometimes complex, legal matters. You should also contact your insurance agent to make sure you have appropriate coverage.

Did you know?  National Small Business Week 2011 is May 16-20. 

To register for one of MMI's free small business webinars, visit the Small Business section of our website.  Also, be sure to download the free Entrepreneur's Guide to Personal Finance eBook

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

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