Setting up as a sole trader: Part 3 – Sticking to your business plan

One of the crucial benefits of Xero is the incredibly detailed overview you get of your business numbers. And when you have an improved view of your accounts, you’re in a much better position to think about planning and performance.

The trick is to think ahead, plan ahead and to use the software to help you get the job done. That makes you future proof and will, ultimately, help you deliver a better profit.

How budgets and cash flow drive your plan

Budgets and cash flow might not sound super exciting, but in fact they’re both essential to the way you plan your sole-trader business.

A good budget does two things:

1. A budget sets out what income you expect to make.
2. A budget also estimates the costs and expenses needed for you to make this income.

The budget is your vision for the business, and having your expectations set out in this way gives you a realistic, workable plan.

Cash flow also looks at your income and costs, but from the point of view of ‘liquidity’ – in basic terms, how much money you know will be coming in, how much will be going out and whether these two numbers leave you with a positive, or negative, cash flow number.

Having a clear budget (your plan) and a great handle on your cash flow (your current cash position) helps you tell whether you’re hitting your targets, or missing by a mile. And that’s so important when you’re in the early stages of your business.

Track and measure your performance

From the day you start trading, you’re recording all your transactions, building up a pool of business data in Xero and following your plan to make sure you’re staying profitable.

These past transactions are called your ‘actuals’ and by comparing these actuals against your budget you can quickly tell if you’re performing well, or if there’s a need for some immediate action to kick things back into shape.

In Xero, it’s very easy to set up key performance indicators (KPIs) to track things like your cash flow, your revenues and your profits. So use the tech, keep an eye on those numbers and make absolutely sure you’re sticking to that all-important plan.

If you don’t bring in profits, that’s usually for one simple reason – you’ve not followed the plan! So make sure you compare those actuals, keep on top of your KPIs and take some positive action when you spot a hurdle coming up in the road ahead.

Make the profit you need to move forward

Hitting your budget and plan is essential if you’re going to avoid wastage and lose the fingers-crossed attitude of some self-employed business owners.

If you’ve left an employed job on a salary of £23k and only make £15k profit in your first year as a freelancer then you’ve lost. Your profit has to match the market rate of your job.

The whole point of being in business is to make a profit. So you’ve got to set a profit target that not only matches the living wage you’ve come to expect, but also factors in all the additional costs and expenses you incur as a freelancer or contractor – things like business insurance, life cover and money to cover your holidays and non-working periods.

So create a budget and profit target that covers your expenses and overheads with enough income to pay you a healthy wage and keep some profits in the business

The link between value and pricing

Pricing can be very difficult thing to get right when you’re starting out. If you don’t know the going rate for your industry, it’s a good idea to do some research – remember the importance of research and finance to your future success.

A lot of freelancers will set their prices by trying to undercut the price of their competitors – but that’s a false economy. Don’t forget the mantra from Part 1 of this series:

1. Follow the plan and stick to your budget.
2. Look for the potential problems
3. Take action when needed.

So, if you’re not going to be the cheapest, how do you differentiate yourself and bring in the profit you’ve set for the business?

The answer is to know the value of the service you’re offering to customers. Research your pricing, work out what you need to earn and be confident in setting a price that factors in that value. You won’t have the lowest price, but your customers will definitely get what they pay for.

To quote the renowned Victorian critic, social thinker and philanthropist, John Ruskin:

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

Differentiate yourself from the competition

It’s something everyone learns in the first year of business studies, but it really is SO important to differentiate your business from your competitors.

And great customer service and adding value are key to this.

• Talk to your clients and LISTEN to what they need from your services or products.
• Give them great SUPPORT and build great, long-lasting relationships with these people.
• Keep your customers HAPPY and they’ll refer you to other businesses too.

Word of mouth is still the best kind of advertising, whether it’s in the real-world or through social media and other networks. If you treat people well, deliver what you promise and make a difference to them or their business, those customers will be more than happy to pay your price – they’ll feel the value.

Support and insight – finding a great accountant

So you’ve got your finances sorted, you’re all set up with cloud accounting and you’re making sure to measure your KPIs, stick to your plan and attain those projected profit targets.

The final step in your sole-trader journey is to find an accountant who can help you get even more efficiencies and benefits from your new business. And we’ll talk about this in the final blog post in this series – so keep your eyes peeled for part 4.

Who are FD Works?

Our accountants, business advisors and Xero specialists have a wealth of experience working with clients across different sectors. If you want to get more from your time, seize business (and personal) opportunities and build a business that makes you proud we can help.