Managing self-employment in a downturn

With a recession becoming increasingly likely as a result of the impacts of COVID-19, many self-employed Australians are understandably nervous about how they will manage any disruption to their income throughout these uncertain times.

In a downturn like we are expecting to see, the best thing self-employed people can do is to put a plan in place to cut spending and free up cash flow. This will mitigate the risks and prepare the business to ride out any financial obstacles as best it can.

Managing self-employment in a downturn

How to prepare

Firstly, remember that you are not alone. Coronavirus is impacting on many industries, businesses, individuals and families. 

As we've already seen, governments, corporates and communities have been stepping in to support those most affected with numerous initiatives (eg. lenders are allowing homeowners to put their mortgage payments and other expenses on hold).

However, if you are being significantly impacted you should speak with friends, family and colleagues – or potentially seek professional help to assist you during this period.

When it comes to arranging your finances, start by looking at potential scenarios to determine what the impacts on your income might be so you can prepare. You may want to develop a financial forecast – our Accounting Advisers can help you there – which considers the various scenarios.

Now is also a good time to review your income protection policy or consider taking out income protection insurance. This will cover you if you are unable to work due to sickness or disability. This is particularly important for self-employed people who may not be able to pay themselves sick leave or annual leave.

NOTE: There have been some changes to new income protection policies from 01 April 2020 - you can read our related blog here.

Cut operational costs and focus on areas that produce income and innovate

Now is the time to scrutinise your profit and loss to identify where you may be able to cut spending – at least in the short-term.

  • Delay any unnecessary spending. Re-negotiate any supplier agreements to ensure you’re spending as little as possible. Cut any unnecessary monthly costs which add up over the course of a year.
  • Focus your spending on areas which increase revenue to the business.
  • If your usual type of customer is now hard to access, are there different types of customers you can pursue? Look for opportunities in growth industries (health, food, IT suppliers etc) to diversify and pursue them.
  • Look at ways to innovate and adapt to the current circumstances.
  • If you normally see clients face-to-face, you can access a range of video conferencing tools.
  • Talk to your customers virtually to keep them updated, such as via social media. Now is a great time to be communicating with potential customers, as they are more likely to be at home on their mobile phones.

How to free up business cash flow

  1. A drop in income can impact your cash flow, so take any steps you can to free up cash reserves can offset any drop in income.
  2. Make sure you’re forecasting your cash flow so you can identify any upcoming bottlenecks.
  3. Set up a payment plan with the ATO to pay tax in instalments or arrange for a payment holiday during this period.
  4. Shift any annual bill payments to monthly to free up cash flow in the short-term.
  5. Incentivise early payments from debtors and crack down on late payments and bad debt.
  6. Consider contra arrangements. For example, if you’re a bookkeeper you could provide bookkeeping services to a marketing agency in return for marketing support. This is a great way to leverage each other’s expertise without putting pressure on cash flow.

How to free up personal cash flow

  1. Pause any voluntary super contributions, but ensure you are covering the life insurance premiums within your superannuation fund. You can resume these at a later date when you no longer require the cash flow.
  2. You may be able to vary your PAYG instalments if you think the current rate will result in you paying too much tax for the year. By varying this, you free up the cash now rather than having to wait for your tax refund.
  3. Request a mortgage repayment holiday from your bank or lender. 
  4. If you are worried you won’t be able to afford your rent, you should talk to your landlord or the property manager about your options.
  5. Reduce the number of days your children attend daycare or take them out completely to reduce your costs.
  6. Move personal insurances such as income protection, life insurance and TPD insurance into your superannuation. The costs will be paid from your superannuation balance, freeing up cash flow. Talk to your financial adviser to see if this is the right option for you and to discuss the impacts.
  7. Negotiate with your providers to pay annual bills in more frequent instalments. That way you won’t be hit with a big bill at once, preserving your cash flow in the short term.
  8. Drop non-essential regular expenses such as regular memberships and subscriptions (magazines, gym, Foxtel etc) and cook more at home.

Do the federal government’s stimulus packages apply to self-employed people?

The Federal Government has now committed over $189 billion in stimulus packages to help Australians deal with the financial fall-out of Coronavirus.

While the stimulus packages largely support small and medium businesses, there are also measures to help individuals and sole traders.

Independent contractors may qualify for the sickness allowance, a means-tested payment that provides up to $560 for singles or $1,010 for couples who are out of work due to Coronavirus.

The Jobseeker Payment (previously known as Newstart) has been temporarily doubled, providing people with an additional $550 a fortnight. The payment will be available to sole traders and casual workers, provided they meet income tests. The government will waive asset tests and waiting periods to access the payment.

People under financial stress will be able to access up to $10,000 from their superannuation this and next financial year. The money won’t be taxed and won’t be treated as income when assessing Centrelink or Veterans’ Affairs payments.

Unfortunately, if you’re a sole trader, the business benefits in the stimulus packages largely won’t apply to you.

As part of the stimulus packages, incorporated small businesses that withhold income tax from employee wages for the ATO can receive 100% of that money back, up to a cap of $100,000 over the first half of the 2020 calendar year, with a minimum payment of $20,000 for eligible companies. Talk to your accountant at The Peak Partnership about whether it is worth incorporating your business to access these benefits.

The Federal Government's JobKeeper Subsidy – $1,500 per fortnight payments for eligible employees – is available to sole traders and contractors. The eligibility criteria to access this JobKeeper Subsidy is quite detailed – you can read more in our blog, or contact your accountant at The Peak Partnership for further advice.

The states are also announcing their own stimulus packages, so do your research to see if you are eligible for any benefits. You can also check in at our COVID-19 Resource Centre for updates.

While this is no doubt a very uncertain time, most self-employed people are highly adaptable and resilient. Most are used to ups and downs in income, so the challenges aren’t unprecedented. Being prepared, doing your research and putting an action plan in place for the worst-case scenario will put you in good stead to weather the storm.


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