Important
Finances are an extremely personal aspect of life — while I am all for sharing what I know, I am still not an expert. I recommend you talk to a financial advisor that can help you set goals that fit your circumstances, and benchmarks to set you up for your success as a sole proprietor/small business. DM me if you need recommendations on who to chat with.
It’s all mindset
Everything that I’ve learned so far about finances in freelancing and running your own business is that fixed income doesn’t exist. Whereas working for a company provides the stability of a consistent pay cheque, the natural flow of business income for us is flexible, and we are constantly estimating. It’s not practical for us to budget by the month because every month is going to look different for us. It makes more sense for us to look at our finances at a quarterly or even yearly cadence.
Banks will also have a hard time consulting for us because they’re silo’ed. Banks have personal finance and small business departments — and they don’t talk to each other. Sole proprietorship businesses are in limbo because in some ways we don’t count as a small business (banks are better suited to consult businesses that are incorporated), and we’re a little more than personal finances.
This means you need to be your own advocate. No one knows the ins and outs of your business the way you do — not even the CRA. They have everything automated because there are hundreds and thousands of us that they need to review. CRA doesn’t have the context of our business — we have the power to course-correct their assumptions and we shouldn’t take their requests personally.
HST numbers are in place so that you collect the government’s tax on their behalf, and then remitting it. This is not your money. Have a savings account collecting that money so that you don’t have to worry about it later. HST should never be built into your pricing, it’s always an addition to your rate. This is also assuming that you’re ready to get an HST number (more information about HST numbers in Building a sole prop business in Toronto).
When tax season comes and you owe the government money, don’t think of it as a bad thing. It feels good to receive money, full stop. But receiving a tax refund also means you overpaid how much you owe throughout the year, and effectively gave the government a free loan. It is not free/extra money — it is your money, you just lent to the government for a year. It’s better to owe money to the government, than for you to overpay the government.
Organizing your $, in case you don’t already have any software or anything else set up for yourself:
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Organize your the receipts you get via email by creating folders for tax years (Business expenses 2023, Business expenses 2024, etc), that way it’s easily accessible for the tax year (I already have something like this in my dropbox, where every year has a folder for business expenses)
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Admin things like this are tedious and annoying — set a calendar admin day every 3 months
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Have 2 accounts to your finances: Business account, and personal account
- Your business chequing account is where all the money comes in first
- Have a savings account specific to holding tax and GST/HST savings (this doesn’t have to be under your business account, if you already have personal savings accounts elsewhere)
- Have a business credit card for your business expenses, which will be easier to track your expenses.
- Your personal chequing account is where you can pay yourself and transfer money from your business chequing account.
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Because our income is flexible and not always the same every month, it makes more sense to have an annual savings plan, instead of a savings account that moves money at a monthly cadence. If there’s money at the end of the year that’s left over, move it to investments.
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Depending on your goals, you can use a tax calculator to determine how much you can contribute to your RRSP/savings (I used Wealthsimple’s Tax calculator). For me, I’ll be aiming to save 20-25% of whatever income I receive.
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Build an Emergency Fund. Depending on your goals and financial circumstances, 3-6 months worth of personal expenses would be practical, plus a buffer for your business expenses. For me, I’ll have about $30K in my emergency fund.
That’s all for now, I’ll keep adding more things as I learn about finances. I think I was mostly worried about whether I needed to do more or less with my money, and whether there was an optimal way of organizing my finances. I’m not in a position where I need to scale and have someone else do my accounting for me — I also want to make sure that I’m running my ship the way I need it to. Until then, I have my trusty financial advisor and spreadsheets that’ll help me stay organized.
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Building a sole prop business in Toronto