Something I have learnt and re-iterate repeatedly to my readers and listeners is that cashflow is the most important thing in personal and business finances. Last year, I got my tax bill wrong and this almost wreaked havoc on my finances… which is rather embarrassing to admit given my background as an accountant!
An expensive mistake
Last April I thought, okay, I’m ahead of the game. I’ll pull my accounts for year three, using my new accounting software tool, and send over my income and expenses reports to my accountant, Christian, to pull together the official accounts.
You see I do most of it myself, but I like to have that sense check at the end of the process and someone to independently check my income, expenses and tax calculations. I had worked out a tax bill of £1,000. This had been saved up over a few months in my separate tax account… but I got it wrong! Rookie error for an accountant, all but qualified 17 years ago. I ‘forgot’ that dividends are taken after tax, not before.
Christian sent back my accounts and I saw £2,500 more than I was expecting. And I had to pay him his fee as well. Suddenly I had to find £4,000 rather than the anticipated £1,000 that I had saved up.
Operation find three grand
Fortunately, I had some emergency business money set aside. I moved this money over to my tax liability account. I then made a few phone calls to my regular clients and explained the situation. I agreed some extra pieces of work, which earned an extra £2,000 during May. Work that I could do immediately, and payment would be received within 7 days.
However, most of my reserves were cleared out and now paid to the taxman. 4 weeks after I had just cleared my credit card debt as well. But I was not getting myself back into credit card debt again with this hiccup.
I went on a big work generation drive and spoke to everyone who I had worked with on my blog over the past year and lined up lots of new pieces of work. June was a tight month financially, but thankfully July and August saw a lot more stability.
So, what lessons did I take from my cash flow catastrophe?
1, Build up an emergency fund
Ideally you should have some business reserves set aside for emergencies as well as personal emergency money set aside. Things happen. Emergencies and unexpected events always happen. The best of us can save for the expected costs to hit but then what happens if the washing machine goes beyond repair, or the gearbox goes on the car?
I recommend at least three months business expenses set aside
I recommend at least three months business expenses set aside. For me this is fairly low being an online business, so I would have at least £2,000-3,000 sat in my business emergency fund. I use the goals section of my Starling Business bank account where I can move money from my main balance and allocate it to separate ‘savings pots’.
For my personal emergency fund, again at least three months of monthly expenses should be covered. I mean essentials here, so mortgage, energy, council tax etc. And you only dip into this pot for emergencies, like if you lost your job, or had a big unexpected bill, a new boiler or an expensive dishwasher repair (that was also me in April).
2, Build up a tax fund
If you are self-employed it is so important to build up a tax fund. Every time you are paid an invoice, allocate at least 20% of that to your tax savings. I must pay my tax at the end of January for my personal tax and end of May for my corporation tax. And soon every quarter for VAT. And I must have resources there to cover my tax liabilities to avoid fines and a huge amount of trouble.
You do not want to get on the wrong side of HMRC.
3, Get a good accountant
The above tax rules for payment are complicated enough without knowing what you can put through as income and expenses. I am an accountant myself, but not practicing, so I miss out on rules changes and updates. Make sure you find someone you can speak to quickly with any concerns, and who’ll correct your errors when you get things wrong.
Bear in mind that you don’t need an accountant near to where you live, as it can all be done on the phone and Skype. I am sent my accounts each year that I print off, sign and return to my accountant by post.
A great accountant is worth their weight in gold and is so worth the fee.
4, Get clear on your cashflow
Understand your cashflow and plot it on a graph. I have four years of books now and know that October through to March are great months income wise for me. Equally, I can see that June through to September are quieter months. Ideally, I try to bank extra money until March to help cover the summer months.
My income can vary by thousands each month, and I have seen swings of £3,000 from one month to the next. It can be difficult to manage but some month-by-month analysis does help.
5, Focus on stabilising your income
A fabulous piece of advice given to me in the early days was to focus on building passive income and regular income. Totally a huge challenge in the online world, but it is a model that gives you stability.
Focus on building passive income and regular income
I have some affiliate money that rolls in every month without me having to do too much, as it’s linked to older good search engine performing content. Maybe around £500 to £1000. I also have advertising on my site that is totally passive. I have also networked and negotiated hard, to set up regular retainer contracts with clients whom I work with every month and pay me every month. These are not all monthly, some are quarterly or even six-monthly. But I know those clients will come back again and again.
This then means that any one-off jobs for a specific campaign are bonus extras, and just add to the funds, as opposed to paying my salary and business expenses.
I just hope being honest about my tax mistake gives you the inspiration you need to sort out your finances and make sure you put money aside for tax. Otherwise, you might be in for an expensive lesson yourself!
Lynn Beattie is a PensionBee customer and CEO/Founder of Mrs Mummypenny, a personal finance website. She is also an ACMA management Accountant, previously working in commercial finance for Tesco, EE & HSBC. Lynn is a single mum to three boys, living in Hertfordshire, and is the author of ‘The Money Guide to Transform Your Life‘ published in September 2020.