For independent contractors, managing personal finances and business expenses often go hand-in-hand.
For contractors, financial management directly impacts financial stability, which becomes even more important amid current economic conditions and rising inflation.
On the upside, with sound financial management and tax-efficient planning, contractors can safely navigate the seas of uncertainty and keep doing what they do best.
Here, we delve into the importance of contractor accounting when navigating economic uncertainty.
1: Comprehensive financial analysis
To truly get to grips with your financial health, you need to go beyond the surface-level numbers.
Start with a meticulous audit of your books, examining your income streams and outgoing expenses in detail. Identify any recurring, unnecessary expenses and eliminate them where possible.
Are there subscriptions you no longer use? Operational expenses that can be minimised without compromising on quality?
Track your income carefully. Is it consistent, or does it fluctuate? Understanding the patterns can help you plan for leaner periods.
Next, examine your tax liabilities. Make sure you’re clear on what’s deductible and what isn’t. For instance, office supplies, travel costs, professional memberships, and certain insurance premiums may be tax-deductible. However, rules can vary, so verify the current regulations to ensure you’re making the most of available allowances.
2: Maximising tax efficiencies
Regarding tax, contractors must understand IR35. This rule is designed to tackle ‘disguised employment’, where contractors work similarly to full-time employees but utilise a limited company structure to gain tax advantages.
If you’re deemed ‘inside IR35’, you may face higher tax and National Insurance contributions.
Understanding your IR35 status is crucial. Misclassifying yourself could result in significant penalties. It’s essential to assess each contract for IR35 compliance separately and to keep detailed records of your work.
The good news is there are ways to structure your working practices to remain ‘outside IR35’.
For instance, ensuring you have the right to substitute another professional for carrying out your work or retaining control over how, when, and where your work is done, can help demonstrate you’re not an employee.
However, it’s critical to remember that these measures must reflect the reality of your working practices, not just what’s written in your contract. Genuine working relationships take precedence over contractual terms when assessing IR35 status.
3: Cashflow mastery
Contractor cashflows tend to ebb and flow, so monitoring short-term and long-term fluctuations closely is wise. In particular, there might be occasions where you’ll close a large number of deals, whereas other times of the month could be relatively lean.
In addition to exploring avenues of making money in off-peak times of the year, mastering cashflow involves absorbing good habits into your accounting workflow.
Here are some strategies to consider:
- Keep an emergency fund: Unforeseen expenses are perhaps inevitable. Having funds set aside can keep such costs from derailing your financial plans.
- Invoice promptly: Don’t always wait until the end of the month. The sooner you send your invoice, the sooner you get paid.
- Follow up on unpaid invoices: Be proactive about seeking payment. Late payments can seriously impact cashflow.
- Plan for tax liabilities: Avoid tax surprises by setting aside a portion of your income for future tax payments.
4: Streamlined financial operations
Optimising your financial operations is more than just keeping a balanced book – it’s about using your resources wisely.
Consider adopting cloud-based accounting software tailored for contractors, which can automate various tasks such as invoicing, expense tracking, and even tax calculations.
As well as saving time, these tools can provide real-time insights into your financial performance, letting you make data-driven decisions and address smaller issues before they become full-blown problems.
5: Long-term financial planning
Contractors don’t necessarily have the same long-term job security as full-time employees, especially in fast-changing markets.
Planning for the future involves making proactive, informed decisions based on your current situation and future ambitions. Here are some considerations:
- Retirement planning: As a contractor, you’re responsible for your own pension. Consider contributing regularly to self-invested personal pensions (SIPPs) and stakeholder pensions.
- Insurance: Protect yourself from unforeseen circumstances such as sickness or professional indemnity claims. While it is an added expense, it provides security and peace of mind.
- Saving and investment: Look beyond the immediate future and consider growing your wealth.
Expert guidance and support
Contractor accounting goes beyond just crunching numbers and expert insight is often valuable.
An experienced contractor accountant can be a great help in identifying areas for improvement and saving money.
We can advise you on tax planning, aid in making informed financial decisions, and ensure you comply with all necessary regulations. Get in touch to find out more.