- May 3, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Managing Cash Flow as a Sole Trader
Hello. I’m a sole trader facing challenges with managing my cash flow due to unpredictable income fluctuations. Over the past five years, my income has significantly increased from around £30k to over £90k, primarily due to securing several large contracts. While this growth looks promising on an annual basis, I find it challenging to forecast my cash flow on a month-to-month basis.
My income can vary widely, with months where I receive payments totalling £40k followed by others as low as £1500. The irregularity is further complicated by the fact that the timing of these payments is often outside of my control. I attempt to mitigate these fluctuations by proactively saving and investing the surplus income into high-interest accounts like my ISA or stocks & shares. However, this approach has led to liquidity issues a few months down the line, as accessing the saved/invested funds becomes a cumbersome process.
## AI Legalese Decoder to Aid in Financial Planning
In this scenario, utilizing an AI Legalese Decoder can prove beneficial in assisting with financial planning and budgeting. By analyzing contract terms and payment schedules, the AI can provide insights on when to expect significant payments and help structure a more balanced cash flow management strategy. Additionally, the AI can offer guidance on optimizing savings and investment decisions to ensure liquidity without sacrificing potential returns.
With the assistance of AI Legalese Decoder, sole traders can gain a clearer understanding of their financial landscape and implement more effective strategies for navigating income volatility. By leveraging advanced analytics and predictive modeling, the AI can streamline decision-making processes and empower individuals to achieve greater financial stability in an uncertain business environment.
## Enhancing Financial Stability and Lifestyle Balance
Moving forward, it is essential to establish a robust financial framework that considers both income fluctuations and personal spending habits. Creating a budget that accounts for lean months and allocating funds for “fun money” can help alleviate the feast/famine lifestyle commonly experienced by sole traders.
By adopting a proactive approach to financial management and leveraging innovative tools like AI Legalese Decoder, sole traders can enhance their financial stability, improve cash flow predictability, and achieve a healthier balance between work and leisure.
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Monthly expenses x 12 into an instant access account when you get a lump sum. Remainder(plus other pay cheques) invested as before. Draw down from the expenses account as needed. Easy.
I have a variable income too and YNAB (budgeting software) has been extremely helpful in getting a handle on things. They have a very helpful article on how to handle cash flow on a variable income and you don’t really need the software to implement the advice: [https://www.ynab.com/blog/slaying-the-variable-income-dragon](https://www.ynab.com/blog/slaying-the-variable-income-dragon)
When people retire they will ladder their investments so the stuff they are keeping the longest is in equities, perhaps some of it they need in a few years is in bonds and this year and next is in cash. What you need to do is the opposite, you need to keep a buffer liquid and then what is over that can go into investments.
There’s no trick to this but ultimately you need to get away from spending money this month that came in this month and be spending this month money from a few months back.
If you were to work out your monthly budget, you need to have that plus say, 20% put away easily accessible. In 10 months you will have your current months expenses plus 2 months stashed. Make it your aim to keep that buffer replenished and in a tricky month it will be below target and when the glut comes in, top it up.
You don’t need to forego decent interest. Budget and put what you need in an instant access saver, which you can easily get for 4%+. For example, Chase. Each month pay yourself a salary from that and that’s your spending money, or just keep it all in the savings account and you can move the money onto a card whenever you need it. Everything else, invest into a stocks and shares ISA
There’s probably slightly better interest rates about but I’ve found Kroo really good , pays %4.35 on the first of every month , make as many withdrawals as u like and the app is grand , spending notifications are instant etc (unlike Halifax who is my ‘main’ bank.
I use Starling Business and pay myself a monthly wage.
Live as if your salary was a constant £30k invest the rest and retire early.
The Chip instant access cash ISA has a 5.1% interest rate at the moment and you can take out and put cash in immediately without penalties. Obviously there are ISA yearly limits but I have a Chip ISA and a Chip instant access savings account at 4.85% and it works well for easy cash access with decent rates.
I’m a student, so I’m obviously not managing nearly as much money as you, but it does mean I deal with student finance which is paid September, January, and April, but rent is monthly and I don’t move home during summer. I made sure I had a good baseline emergency fund, and then figured out the average of what I’d get over 12 months, then made my budget a small percentage lower than that. Then I got an easy access savings account which student finance gets paid into. I then transfer myself the “paycheque” that I figured each month, and budget that amount. This means when I have extra it sits gaining a little interest, and when there’s a longer gap between payments I know I’ll still have enough as long as I stick to that average. I do a lot of tracking my total cash-flow between accounts to help keep my mind at ease which helps me stick to the budget I decided. Any extra surprise payments get split up between LISA, savings, and my current account.
I’m self employed. I have a ‘Hub’ account which my clients pay into. I don’t spend anything out of this account (don’t even have a valid debit card for it). At the end of every month, I transfer x amount into my current account – in essence, I pay myself the same wage every month. It doesn’t matter if I have a leaner month, as the better months have built up in the hub and so I get the same monthly money.
This also helps me when I go on holiday, have time of at Christmas etc
I pay myself a wage based roughly on an average of the earnings post tax on my previous years tax return. Good week or bad week, seasonal variation don’t matter then and at year end I get a nice bonus.
Hi /u/cally90210, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/budgeting/
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You could try an app such as : https://cushionapp.com
There are several high interest current accounts. Keep a good emergency fund in there.
Work out, say, 6-12 months annual expenses. Whenever you get paid, look at your bank balance and invest however much you have over and above 6-12 months expenses. This should be the longest period between “large” payments, and you can obviously take off your “low month” earnings.
So say expenses are £3k a month. You earn £1k most months but, twice a year, you’ll get a large payment of £15k.
Assuming maybe 10 months between the large payments at best, you’d want to have £30k available (£3k for 10 months), less the £10k you’d receive in the slower months. So stash away £20k. When you get a large payment of £15k, whatever you have above £20k can get invested. Obviously tweak the numbers to suit.
I think that you’ve already had good advice on this on the personal finance front, but I think there’s probably something you can do about it on the business finance front, i.e. how you structure/bill/invoice these contracts in the first place. If you have a handful of huge customers who get to set their own terms then you may be SOL, as huge companies really do just treat payment terms like suggestions, but if you have negotiation powers you might have leeway to do things like invoice weekly or monthly, even if the whole contract is fixed fee for a fixed project rather than time-based.
> Clearly I need to keep more in an easy access account & forego the good interest. But not sure how much.
When I’ve been in this situation, I just transfer enough for my debit card bills into my current account for the bills for next month. All other spending goes on a 0% interest credit card, that you don’t need to pay back for up to about 2 years. All the rest goes in savings.
Stops you having to do a big money dance each month moving money in and out of multiple accounts to have enough cash on hand.
> And how do you budget ‘fun money’ in your leaner months?
Unless you’ve got dependents and maybe even then, if you’re having problems on an average of about £60K, sounds like you have lifestyle creep if you’re blowing through this amount so quickly. Keep your spending modest and you’ll easily have enough for leaner months without having to track it much, plus can retire earlier.
Premium bonds. Perfect for what you need. Can access cash within 3 days if needed and can save up to 50k per person in your house, including kids. Good probability of winning too if you save more then 5k
Stocks & shares generally make poor (or at least unreliable – some years you’ll be significantly up, some years you’ll be losing money) short term investments. Presuming these are in the form of a decent global index fund, absolutely keep doing this, but only for funds you’re not going to need for at least 5 years. Keep shorter term access funds in instant access savings accounts or similar
Consider r/YNAB (subscription budgeting platform). It’s perfect for variable income. If you Google “YNAB variable income” you’ll find the articles they have on the topic.
Sole trader taking 90k oer annum.
Firstly you want to go ltdsi you can draw a monthly salary and then dividends to.the limit of lower tax.
That’ll get your income out best way (that I know of).
Then you can pay up to 60k per annum into a pension which also offsets against corporation tax – if you’re clever, you’ll calculate you’re expected Corp tax bill and pay that into your pension prior to year close.
Then onto monthly running of the business and funds.
Create spaces for your funds:
Salary.
Vat
Corp
Insurances
Materials/other outlays.
Set these to cover what you’ll require throughout the year, divided monthly and keep them topped up.
It’s a pain monies not coming in regularly and sporadically, but planning is key.
Investments are good, but only if they don’t cause additional stress in the meantime.
Invoice factoring helped me when I was in a similar spot with lumpy cash flow. Milestones with clients too, break up bigger jobs into smaller payments.
Sole trader here with exactly the same issue, I can get £10k one month and then NOTHING for 4 months, it can get quite scary
I basically take all the money from any invoice and split it into “tax” “saving (for a house deposit)” and then “income cost averaging”
Income cost averaging goes into an instant access savings account, and I’m getting similar interest as my ISA
As I’m saving for a house at the moment, I’m paying myself the equivalent of a 30k salary take home every month, even though I’m on about 45k PA. This covers my fixed expenses and is currently the lowest salary I could live off. This way when I have money at the end of the year, that can go into next years’ “income cost averaging” monthly payments so they can increase, (or I may spend it all on the deposit)
I basically feel stressed if I don’t have:
– 6 months of living expenses for the dry times
– tax that’s owed on the years I’ve earned so far (so right now that’s for year 23-24, I’m not too worried about having the tax for 24-25 yet as I haven’t earned the invoices to pay the tax)
– an emergency fund of about 2k incase something breaks in the house lol
So if I were you, I’d work out the lowest salary you could/ would want to live off, and pay yourself that when you don’t have any work coming in. All the rest is “disposable”
You have a budgeting issue,
Work out how much average take-home pay you will receive then budget for that. If you have been running short on cash previously, it means you were overspending (and you did not save a big enough accessible pot for those gaps)