How to reduce costs and raise income

When getting ready to go into Business, many people look forward to a new and independent lifestyle. For many, the ability to govern one’s own time, projects and even income, are the main attractions to being self employed. Self Employment is seen as a type of freedom from the boss, mundane 9-5 routine and mostly, financial freedom.

The reality is that this is a rather naive impression of self employment. Most successful start-ups endured very lean start-up years – which is taxing on both the owner’s time and finances.

If you’re looking at making the jump into self employment for the first time – or even a second time – perhaps you should consider reducing your own financial commitments as much as possible beforehand.

Simply put, your businesses income is essentially your income.

Actually, it’s less, when you take out your business overheads. And this will be view taken by Revenue, your bank and other creditors. So, if your turnover is going to rise and fall monthly or cyclically (as it inevitably does, either for seasonal or other economic conditions), then so will your ability to meet your monthly commitments. This applies to both sole trader and limited company businesses (where the number of promoters is 2-5 and in the invested capital is under €100k).

Many business plans I’ve reviewed (this includes my own personal ones) include extravagant salaries for the promoters. When I say extravagant – almost any salary may be extravagant. It’s probably one of the biggest hurdles and undoubtedly the biggest stone around any new business neck.

Even if you have modest ambitions in terms of drawing down any earnings, the leaner you make yourself, the less of a weight on your cash flow you will be.

Some of the ways you can make yourself leaner would be to examine these, in conjunction with your financial advisors of course.

Accurately calculate your self employed/director’s PAYE and PRSI and pay this monthly.
Make sure your accountant accurately calculates your payments – don’t pay too much and certainly don’t miss any. Get into a habit of paying monthly – and submit your PRSI number with it. The less you earn – the lower your personal taxes will be. For example, at €1,000.00 per month it may be as low as €150. At €2,000.00 (Net), it could be €500.00. Take a look at this more in-depth article on Director and Sole Trader’s salaries.

Get rid of the flash car
Downsize to a nice, clean, second hand diesel. Reliability and profitability are the name of the game. A good second hand diesel could even make you a few bob if you’re a director (if your work related mileage is high) but either way it will cost less to run on your business.

Pay off or re-negotiate your loans and credit cards
Credit cards are the worst type of credit facility in terms of the running costs, interest and actually getting around to reducing the principle. Talk to your business and financial advisors and get these squared away first.

Look for alternative incomes
Many people may not be able to move or buy a house, but its a great time to rent and avail of the Rent-a-room Relief Scheme. This scheme provides for people who rent a room in their main residence to a private individual. The income is tax free (up to a ceiling amount). For some this may mean an additional €400.00 to €500.00 extra in tax free income that doesn’t come from your main business. This also gets taken into account by your bank when calculating your income.

Know your expenses and claims
Know what expenses you can claim for – especially if you are a director. Many directors have a lot of driving to do – thus claiming the standard civil servants rate can go a long way to paying for the cost of owning and running a car. Sole-traders can offset a fifth of the value of their car as well as directly covering other related running costs. Directors can also claim subsistence when travelling away at a fixed daily rate and even more when staying overnight. If you have to travel across country for sales meetings or to work on short term projects, this could go a very long way. I’d suggest reading Nilsson Denver’s website for more some greater information on expenses and claims.