How to budget if you’re self-employed

Poor cash flow is one of the main reasons why businesses crash, causing 38% of startups to fail in 2021. While budgeting can’t completely solve the issue, it can alleviate some of the pressure. 

But creating a budget can be difficult, even when you’re not trying to manage a business too. To make things easier for you, we’ve collected some of the best budgeting tips in this article.

We’ll go over:

• Figure out your finances
• Calculate your outgoings
• Treat each month like a bad month
• Plan ahead
• Save up
• Create a goal

Budgeting when you’re self-employed can be both stressful and challenging. We’ve explained a couple of steps below to help you get on top of your money. 

You can’t budget if you don’t know where money is coming from and going to. You need to know exact amounts, and accounting software can help with this. 

The Countingup app, for instance, can automatically track and sort all your business’s transactions into categories. Perfect for spotting every last penny, which is exactly what you need when budgeting.

Simply giving a rough estimate isn’t going to help you succeed, and can lead to accidental spending later down the line. While it may feel like an extra effort, you have to know your cashflow down to the penny. 

The general principle of business is that ‘you spend money to make money’. So split all your costs into three categories. These are:

This is the money you must spend to run your business. You can’t change these costs very easily, and you’ll always have to pay them. Here are a few examples:

• Rent
• Gas and electricity
• Insurance

Since you’re self-employed, this also includes your personal expenses, like food and utilities. Also bear in mind that you’ll have to pay Self Assessment taxes. Treat this like any other monthly bill, instead of covering it all at once. 

In most cases it’s good to separate your personal and business expenses. But when working out your budget, knowing how much you need to be able to survive is essential. 

These costs are things that can be reduced with some effort. A mobile phone contract, for example, can be switched to a cheaper plan — but you might need to wait or pay a fee. 

Reducing these costs may not always be the best decision, and can limit how effectively you run your business. If you’re thinking about cutting costs in this area, do it on a case by case basis, and look at what’s realistic. 

All the money you spend on things your business doesn’t need, or can easily reduce the cost of. For example, if you buy bottled water you could switch to tap water and cut your costs. 

This can also count for your personal spending. For instance, if you subscribe to several media streaming services (like Netflix), you can freeze your account to save money. 

Now you know exactly how much money needs to be spent each month, set that as your baseline. That’s the minimum amount of money you need to earn to keep your business running. 

Compare this to your monthly income. If your revenue is irregular, then use your lowest monthly income. 

Not every month is going to be a good month. By expecting each month to be bad, you’re ensuring you can handle periods of low income. If your actual income is a lot higher, great! You can use this to help improve your business, or cover some less necessary costs.

Throughout the year, your business’s earnings can vary quite a bit. This could be seasonal, or reflect your customer’s spending habits. Creating a sales forecast can help you predict these rises and falls. 

With an accurate forecast in place, you can spot months with rises and falls more easily. You might have more money coming in at the start of the year, and have higher costs towards the end. 

Using your sales forecast with your budget can highlight when you need to save more money. Managing a changing income this way can protect your business in months with lower profits. 

Every time your income exceeds your budget, save a portion of it. Slowly, this will start to build and before you know it you’ll have some sizable savings in your account. 

This will be your ‘rainy day fund’. If a major issue occurs (e.g. equipment breaking), these savings can help you overcome any unexpected financial burdens. 

The world is unpredictable and you never know what tomorrow will bring, so building a safety net is a must. 

Saving money just to save it isn’t the best motivator, even if it’s for your business. Instead, try setting a goal to work towards. This could be a new piece of equipment for your business, or maybe a personal holiday. 

By setting a specific target you have a concrete plan to aim for, and you’re more likely to achieve it. 

You might want to set multiple goals, and treat them as milestones for your business. This can help you feel like you’re constantly achieving something, and keep your motivation high. 

We mentioned earlier that the Countingup app is great for figuring out your finances. But it’s even better at helping you stay on top of them. 

By automatically sorting your spending, you can keep an eye on any expenses that start cutting into your budget. 

Or if receiving payment is an issue, it lets you send fully customised invoices straight from your phone. When payments come through they get attached to the matching invoice, so you know who has paid what. 

Are you ready to give your business a helping hand? 

Download the Countingup app today. 

If your business is new, you might not have created a financial plan. This can help you develop your business’s goals, and make better long-term decisions. 
If you don’t know where to start, try our guide ‘How to create a financial plan’.