Every Accounting Problem A Sole Trader Has Ever Had & The Solution

Most self-employed people don’t realise how easy it is to commit business suicide, by making (mostly) innocent mistakes. In fact, 20% of sole proprietor businesses fold up every year in Australia. With business troubles all too common in this country, you could be next. Here’s our comprehensive list of problems faced by sole traders, that includes everything you need to know to stay out of trouble.

Drawing The Line
One of the most common and easiest mistakes to make is not separating business and personal finances. Most people think it’s fine to fly by the seat of your pants, but as soon as your business takes a big hit (and statistics show that many do) then you yourself will be liable. Make sure you have separate accounts for yourself and your business, and pay yourself a set wage out of your business earnings.

The Cookie Jar
Don’t get caught with your hand in the cookie jar. Too many small business owners and sole traders borrow money from family or banks. Family because they’re cheaper, and banks because they’re considered the ‘safe’ option. However both courses of action are fraught with hazards. By borrowing money from a family member, you put them at risk of losing a huge sum if something were to go wrong. Whilst banks tend to have debilitating interest rates. The best thing to do is to borrow from a lending institution other than a bank.

Assets
A lot of self-employed people tend to believe the common myth that small business owners are doing better than everyone else. The reality is that business is just as hard as working for the man. Thus, it’s important not to make purchases that your business can’t really afford and you don’t really need. These purchase are more of a status symbol than anything else, and could put your business at financial risk.

Handling Cash
Once upon a time, handling cash was considered the clever way to go about business and cheat the taxman. These days, it is far too risky and doesn’t pay off. If you’ve purchased your house and car by handling cash, sooner or later someone is going to ask where the money came from. Then you’ll find yourself in debt to pay it all back. Most importantly, while handling cash, you don’t know the true position of your business, and will ultimately lose control.

Accountants
When sole traders find themselves in business trouble, the first thing they usually say is, ‘Why didn’t my accountant tell me?’ Small business owners should ensure that their accountant can inform them on how to protect their home and their assets, and everything they need to know about tax compliance. If your accountant doesn’t know how to do these things, they’re not doing their job.

Controls & Measures
Sole traders find themselves in financial trouble and debt when they do not create controls. You need a credit policy to protect your cashflow. You need to pay tax weekly, so that a big tax debt doesn’t come back to bite you. If you’re married or in a defacto relationship, get yourself off the title of your house and leave it under their name. This will protect you from losing everything should something go wrong.

For more tips and tricks on how to survive as a sole trader, get Gavin Waring’s How Not To Commit Business Suicide.