Cover Your Costs and Make Money
Most bookkeepers operate as sole traders, although the number of bookkeepers operating as a company is increasing. Business entry and exit rates are the highest for sole proprietors. Many sole trader service providers struggle to be successful in the early years, and many opt out of being in business and go back to being an employee. Why do you want to be in business for yourself? It’s good to be clear about the reasons for being self-employed so you keep focussed on your main priorities.
How Much Do You Cost?
It is surprising how many people don’t actually know how much their lives cost. What does it take to live your life? Yes, even bookkeepers are guilty of not being across their own finances. Many of us take great care with the finances of others, yet we don’t look at our own. Do you know how much you actually spend on food, rent / mortgage, utilities, phone, vehicle, entertainment, gifts for friends and family, clothes, haircuts, etc., etc.? Are you spending more than you earn? Are you relying on credit cards to pay your living expenses and paying hundreds of dollars per year in interest?
Then you have to factor in all your business expenses, tax and superannuation on top of that.
If you are struggling financially, then you must do the exercise of looking at your personal finances and what you spend on yourself, as well as considering all business expenses and looking at your own plans and marketing within your business.
How Much Do You Charge?
If you have not looked at your charge rate for some time, and you feel you are not covering your costs, nor can you afford to take a holiday, go through the charge rate exercise as part of your planning. If you want to pay yourself $30 an hour for an average working week as a bookkeeper, you will need to be billing around $58 per hour. That extra $28 an hour is spent on registrations, unbillable hours, equipment, insurance and so on.
If you are charging fixed fees or packages, it is a little harder to calculate but an easy way is to simply look at your income and the hours worked, (by yourself and other workers in your business); this gives you the average hourly rate you are receiving. You can still then use the charge rate calculator to assess your needs and to see if your fees are actually covering your expenses.
Going through the exercise of assessing both business and personal expenses and income should be an annual process.
See the related article in the April 2016 newsletter on Bookkeeper and BAS Agent Rates of Pay for more detail.
A Simple Breakdown for Budgeting Purposes
For all business income, you could allocate as follows (this is a rough guide only and you would have to adjust this for your own circumstances):
- 10% super
- 20% tax
- 10% emergency fund/savings/holiday/future planning/investment
- 10-15% business costs
- 45-50% personal expenses and spending money
Yes, that means that 40% to 55% of your income is being put away into other accounts that you don’t touch until needed for that specific purpose. Put your super into its own account and then transfer the full amount each month or quarter.
Many banks offer online accounts that are free. And you can get bank feeds for all these accounts. So get your own accounts on software with bank feeds, set up automatic transfers from your main account into your other accounts. Or every time you receive a customer payment, transfer the percentage breakdown to your other accounts. Then be disciplined about retaining the money in each account only for its intended purpose.
As a side note - consider putting aside funds to an account that you do not touch unless there is an unexpected emergency. Let this build up to an amount of say 2-3 months’ worth of living expenses so that you have some security behind you - and commit to leaving this specific amount untouched. If you have to dip into it for an emergency, top it up as soon as you are able to.
Realistic Planning and Marketing
Do you need another job while you are starting out? Some advisors say you should essentially work two jobs while you are starting out - one is your “bread and butter” job that will cover your living costs; meanwhile you work at your other business, in this case bookkeeping, in the evenings and weekends until you have built up enough work that you can gradually reduce or drop altogether your other job.
Too many think they will magically make enough to live off and cover all business costs within a few months. Time and again it is proven that word of mouth is the most effective way of obtaining clients. If you don’t have clients or a large network to draw from, you need to get out there and sell yourself. Make connections with people.
- Network meetings
- Business networks e.g. local council
- Women’s business groups
- Industry groups
- Local business - drop flyers or business cards
- Online communities
- Software communities
- Connect with accountants and tax agents
Superannuation and Sole Traders
If you are not paying yourself at least the standard rate of superannuation, why not? It is a fact that many sole traders do not pay themselves super and are seriously under-funded compared to employees earning the same amount. Around 29% of self-employed Australians have no superannuation at all. 90% of women do not have enough superannuation when they retire to fund the lifestyle they are used to.
The average superannuation account balance of women is $90,000 less than the average for men. Apparently, only 20% of workers are actively engaged with their superannuation and take an interest in managing their affairs. That is 80% of workers who are not interested! Get involved in your own superannuation now and plan for your future.
Updated: 18th April, 2016