How self-employed people can prepare to weather the coronavirus storm

With a recession becoming more and more likely by the day 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 this time. 

While we may not know whether a loss in income will occur or how significant it may be, the best thing self-employed people can do to prepare is put a plan in place to cut spending and free up cashflow. This will mitigate the risks and prepare the business to ride out any bumps in the road. 

How to prepare

Firstly, it’s important to remember, you are not alone. Coronavirus is going to have a large impact on many industries, individuals and families. While individuals will be impacted at varying levels, there is no doubt everyone will be impacted in some way by the current pandemic. 

From what we have witnessed in other parts of the world, governments and communities have been stepping in to support those most affected with numerous initiatives such as enabling homeowners to put their mortgage payments and other expenses on hold. 

It is important in these times to remember you are not alone, and more than ever, this is the time to support each other. However, if you are being significantly impacted I suggest you speak to friends, family and colleagues, or potentially seek professional help to assist you during this period. 

When it comes to preparing your finances, start by having a look at potential scenarios to determine what the impacts on your income may be so you can prepare. You may want to develop a financial forecast with your accountant or financial planner which considers the various scenarios. 

Now is also a good time to review your income protection policy or consider getting 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. 

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

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

Delay any unnecessary spending. Re-negotiate 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 spending on areas which increase revenue to the business, such as marketing. 

If your usual type of customer or client is now hard to access, are there different types of clients or customers you can pursue? Are there opportunities for you to evolve or pivot into? Look for the opportunities 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 video conferencing.

If you require signatures on documents, leverage electronic signatures through services such as DocuSign.

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 cashflow

1. A drop in income can impact your cashflow, so any steps you can take to free up cash reserves can offset any drop in income. 
2. Make sure you’re forecasting your cashflow 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 cashflow in the short term.
5. Incentivise early payments from debtors and crackdown 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 cashflow. 

How to free up personal cashflow

1. Cease any voluntary super contributions. You can resume these at a later date when you no longer require the cashflow.
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. Talk to your mortgage broker to organise.
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 cashflow. Talk to your financial advisor 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 cashflow in the short term.
8. Drop non-essential regular expenses such as regular subscriptions such as magazines.

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 fallout of coronavirus. While the stimulus packages largely support small 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 veteran’s 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 about whether it is worth incorporating your business to access these benefits. Separate measures may be announced for sole traders down the track. 

The states are also introducing their own stimulus packages, so do your research to see if you are eligible for any benefits.

As the lockdown continues to deepen, you can expect that further stimulus packages will be announced, similar to other countries around the world.

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. 

NB: At the time of writing, this advice was given on current circumstances. This may change as circumstances or government advice changes.

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