Okay, so the title is a bit misleading, well, I feel like it gives off the impression I know 100% what I'm doing with my finances, but just like everyone else it baffles me most of the time!
That being said I have learnt some things over my small business journey which I feel other people may benefit from, so I thought I would share them with you!
I'm going to answer some of the questions I had when I first started my business journey:
When do I have to declare myself as a business?
The U.K government states you will need to set up as a sole trader (as Doodling Lucy is) if you earned more than £1,000 from self-employment between 6 April 2020 and 5 April 2021 (then 2021 - 2022 etc).
To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return yourself or have an accountant do it for you every year, you can find out more here.
What do I need to keep a track of?
When it comes to the joyful time of completing your tax return you will have to make sure you have certain figures ready. You need to keep records of all sales and all expenses and you'll need to keep these on file for seven years. Even after you have filed your return for the year - so make sure you get some folders ready to keep them all in!
How do you keep track of it all?
Make sure you get either a business bank account (which is a little more complicated) or a separate debit account which you use only for your business. Nothing else. It makes it so much easier to keep track of things.
I have a very simple excel sheet for each month which has two columns, one for sales and one for expenses with totals at the bottom. I keep this tab open almost all the time on my computer and laptop, the majority of my payments (royal mail labels, packaging costs, printing costs etc) are done online so whenever I make a payment I add into it straight away.
Every week I will check back through my account on online banking to make sure the numbers and payments are matching all those on my excel sheet.
How do you work out your profit and how much tax to pay?
On the excel sheet I mentioned above I have row which is the sales minus the expenditures this gives me my profit for each month. However, you don't pay the tax on that until the end of the year* when you complete your tax return so not all of that money is yours.
* I have heard rumors of this changing to quarterly but again I'm not 100% sure, remember I said it baffles me!
How much tax you pay depends on how much you earn, so for the first few years when you are getting your business started its difficult to know. Especially if you grow quickly.
Something my sister (who is also self-employed) taught me to do, and something I have stuck to religiously is putting away 25% of my profits every month (no matter how little or how much I earnt that month) into a separate savings account named 'taxes' (saving accounts like this are very easy to open up online).
This is to stop me thinking I have that money for myself which I don't. The 20% is to cover the tax bracket I am in and the extra 5% as a safety net, just in case. No matter how appealing it is for me to dip into that account I never do.
The tax brackets for profits are as follows:
- Personal Allowance: Up to £12, 570: 0%
- Basic Rate: £12,571 to £50,270: 20%
- Higher Rate: £50,271 to £150,000: 40%
- Additional Rate: Over £150,000: 45%
Keeping track of everything is super important
How do you complete your tax return?
This is one I really don't know much about so it's best to research it on the governments website here.
This is where I fess up, I have only done one tax return myself, and I think I earnt just over the self-employed status threshold which is £1000 so there wasn't a lot to keep on track of.
I was very fortunate to grow quite quickly in 2020 which is when I felt overwhelmed by the tax side of things. I then decided that it was time to ask an accountant to do my return for me and take the stress of it away.
So, now, after the tax year is up I send all my business bank statements alongside my excel sheet to my accountant and she will file it for me. Accountant fees vary but for the reduced stress I was more than happy to pay the amount I was quoted.
If you feel like it is weighing on your mind it is definitely worth looking into. I also found it helped as I was told so much about what I can claim and what I can't claim for - e.g. Petrol for driving to the post office, phone bills, electricity for my studio etc
How do you keep on top of cashflow?
Again this is a difficult one to answer as I feel like this is very dependent on your own situation. I was lucky enough to live with my parents whilst starting my business which means, although I was paying rent, I was able to save a lot which helped me with cashflow.
However it is important to work out when you make the most profit and to keep a hold of it for quiet times.
Christmas for me is a very busy time, but I never pay myself more than I do throughout the rest of the year. The rest of the profit goes straight back into my business and is saved for quieter times throughout the following year.
How do you not freak out about money?
When I know the answer to this - I'll let you know!
Hopefully this is useful for someone out there, please note that all the information is based on my own personal experience and needs to be taken as such. All statistics were correct at the time of writing and may vary in years to come.