TOPIC # 1
Every day we see people in our office who became self-employed for numerous reasons but ended up with large debts that they couldn’t pay and decided to use bankruptcy or a consumer proposal to deal with their debt load.
Part of this process is financial counselling and over the years I’ve learned that there are common themes for self-employed people who end up insolvent.
Here are the top 5 from a budgeting point of view:
#1 - Record keeping? Who has time for that?
Many self-employed people are fantastic at what they do, their trade or business, but they lack the time or expertise to keep up to date with their monthly bookkeeping. The further they fall behind on their record keeping, the less likely they are to get them ready in time to have their taxes done. It can snowball until someone finds themselves in a position of not filing their income tax, GST or source deduction returns for a number of years. The other consequence is they cannot properly budget or forecast for their business as they really have no solid idea of what’s happening.
#2 - I can’t afford a bookkeeper!
If #1 is familiar to you and you want to stay in business, you can’t afford NOT to have a bookkeeper! Having the right professionals guide you is worth every penny.
#3 - Feast and Famine
Often with small business, income is cyclical and without proper planning, you can fall into a trap of spending heavily during times of feast and incurring copious amounts of debt during the famine months. These habits become the downfall of many sole proprietors or small businesses as they have to use the bulk of their income during the feast to pay down the debt. Rather, if you can come up with a minimum amount each month that you need to live and set aside a certain amount of any excess so that you have an equal amount of income throughout the whole year, life will be more comfortable and you will not need to rely on high interest debt to get you through.
#4 - Quarterly installments
Income tax, GST, provincial sales tax, source deductions for employees…falling behind on any of these will get a small business into trouble quickly, if they don’t properly plan or keep on top of installments. Setting aside these amounts each month into a separate account so you have the funds to pay each quarter, will help you stay solvent and keep the tax department happy. It’s easy to dip into these funds when an emergency comes up, or a supplier needs to be paid, or the van needs a repair. Once you fall behind, it is very hard to keep on top of current obligations as well as past due amounts.
#5 - Emergency Funds
Just like any individual, a small business or sole proprietorship needs to be prepared for irregular expenses that pop up during the year. Think of equipment repairs, tool purchases, insurance, etc. Ensuring that you budget for these items will help you sustain your budget throughout the year.
If you do find yourself in a position where you can’t keep up with your payments and grow your business, contact D. Thode & Associates Inc. today for a free consultation.
Filing a proposal may be the solution you need to avoid bankruptcy and save your business.