Being self employed comes with greater independence and flexibility of working hours but it can also mean an irregular income. Real estate agents, commission sales people, contractors, temporary or casual workers and a host of other occupations come into the same category as small business owners in this respect.
One of the fundamental principles of good financial management is to have a budget. The problem is, how can you budget when you don’t know what your income will be? A complicating factor is payment of taxes such as provisional tax, GST and PAYE. When cash is tight, it is tempting to spend everything that comes in and hope there will be enough on hand to pay tax when it is due.
Dealing with uncertain or irregular income requires a high level of skill in financial management. There is one key principle that is vital to success and that is separation of income into three components; business income, provision for tax and personal income. This separation needs to be done at the time income is received and requires different bank accounts to be set up. From your business income account, transfer a percentage of income received into a tax account each month and a fixed amount into a personal account either fortnightly or monthly. Personal income needs to be a fixed amount so a personal budget can be prepared with a certain income. It should be set at a level that is based on the average annual income. The business income account balance will fluctuate each month and if it builds up to a high amount, extra cash can be transferred into the personal account as a one-off payment. Managing money in this way requires discipline but will help avoid business failure or having to revert to working on a salary.