The realm of self-employment presents a tantalizing prospect: the freedom to pursue your passions, set your schedule and be your boss. But it also comes with the responsibility of managing your finances — effectively.
After meeting with thousands of self-employed professionals over the years, I’ve seen the same seven costly mistakes committed time and time again. And in pursuing your entrepreneurial dreams, it’s essential to be aware of these common pitfalls many self-employed people encounter.
Whether you’re just starting your self-employment journey or you’ve been rocking the 1099 life for a while, these are the mistakes you must avoid.
1. Confusing income with profit
Do not let the allure of high revenue cloud your judgment. Learn the importance of distinguishing between income and profit to accurately assess your business’s health.
To do this, subtract your total expenses from your total revenue for a given period (usually a month, quarter or year).
The resulting number is your net profit, which represents the money you have left over after all expenses have been paid. And keep in mind that since you’re self-employed, you also need to factor in your self-employment tax liability payments that should be made quarterly.
Remember, it’s not just about increasing your top line – it’s about improving your bottom line.
Related: 5 Reasons Why Employees Prefer Self-Employment, and Why You Should Use This to Your Advantage
2. Prioritizing short-term gains over long-term success
While it’s natural to be cautious with spending, it’s essential to strike a balance between short-term gains and long-term success and sustainable and scalable revenue growth often requires investments in your business.
Explore the concept of profit first and learn how prioritizing profit over expenses can help you build a sustainable business. You must be familiar with the importance of strategic investments, proactive budgeting and scalable revenue growth for long-term financial stability.
Think of it like the toothpaste theory: When you possess an abundant supply of toothpaste, you tend to use it more liberally. Conversely, when the tube nears depletion, you painstakingly extract every last drop.
By proactively budgeting and prioritizing profit, you can set your business up for sustainable and scalable growth.
3. Selling yourself short
Avoid undervaluing your skills and expertise, as it can hinder your long-term career prospects. Embrace a vision for your business and price your products or services accordingly. Learn the art of building rock-solid relationships, delivering undeniable value and creating a reputation hotter than the newest TikTok dance trend to build a sustainable pipeline.
Related: Don’t Sell Yourself Short in the Gig Economy
4. Focusing on metrics that don’t matter
Shift your focus from vanity metrics to meaningful data that truly impact your business.
One common mistake is looking only at your profit without factoring in tax liability. If you don’t account for taxes, you may be overestimating your actual profit and underestimating the amount you’ll owe to the government, creating a cash flow problem for your business in the future.
Spend time defining the metrics that align with your business strategy and goals.
Related: The 4 Deadly Sins Sabotaging Your Business
5. Not letting your money make you money
Inflation is constantly eroding the value of our money, which means that the longer you keep your cash sitting in a bank account, the less it’s worth. So, it’s critical to make your money work for you.
Try exploring various investment options, such as reinvesting in your business, investing in real estate, stocks, mutual funds, retirement accounts, peer-to-peer lending, and cryptocurrencies. Gain insights into making your money work for you and use compound interest.
6. Avoiding smart debt
Debt can be a useful tool when leveraged responsibly.
One type of debt to consider is short-term debt. This can be useful for covering expenses that come up unexpectedly or for taking advantage of opportunities that require immediate capital.
Long-term debt, on the other hand, is typically used for larger investments in your business, such as purchasing equipment or expanding your operations. For both types, it’s important to carefully consider the terms and interest rates, as this will impact your bottom line over time.
It’s also worth considering other types of debt, such as lines of credit. These can be especially useful for businesses with fluctuating cash flow, as they allow you to borrow money when you need it and pay it back when your cash flow improves.
Related: Self-Employed With No Employees? You Can Still Get a PPP Loan
7. Ignoring your business’s seasonality
Understanding your business’s seasonality is crucial to its success. It can help you predict cash flow, inventory needs, and staffing requirements throughout the year. It’s essential to recognize the trends in your business and be prepared for the fluctuations that come with it.
When you start tracking the seasonality, you’ll learn how to predict cash flow better, be able to forecast inventory needs and plan staffing requirements based on seasonal fluctuations. It also helps avoid unexpected expenses and maintain profitability throughout the year.
You possess the remarkable ability to shape your future, and by steering clear of these financial sins, you can set yourself up for extraordinary success in self-employment.
Read the full article here
