These are some money and finance related questions I regularly get asked by my clients and creative businesses.

Am I regarded as ‘self-employed’ or a ‘contractor’?

It’s important you know your business/tax structure. It may be that you operate through a company, or are simply a ‘sole trader’ (ie self-employed). There are several ways to set up your business, and tax treatments will vary depending on your structure; but it makes little difference to managing lumpy income. Yee Yang 'Square' Lee has covered business structures.

My earnings are so erratic. How can I manage my money better?

Make time to try and predict what future earnings (and expenditure) are most likely to be. Like the squirrel, when times are good (and the cash is flowing in) you need to put funds aside to cover the lean times.

When I talk to financial advisors or my bank about a personal loan or overdraft they ask “show me your cash flow forecast” or “let’s have a look at your budget”. What’s the difference?

Cash flow is the simple term used to explain what you expect to flow in and out of your bank account. So a “cash flow forecast” is simply trying to predict the transactions that will appear on your future monthly bank statements.

Ideally you list (as best you can), the predicted cash flows (both the dollars and timing), and as each month passes track expectations with actual results so an informed decision can be made about how to handle the overs/unders. When sailing a boat one pushes or pulls the tiller to adjust direction to ensure the destination will be reached. Same with managing cash. The forecasts tell you the direction and tracking actual transactions will guide you on which way you’ll need to change course.

A Budget is where you list your expected income and expenditure in an attempt to predict future net earnings (and get a handle on what your tax bill might look like). Net earnings for someone self employed is comparable to wages for an employee. So here you’re trying to forecast what you’ll be telling the Tax Department at the end of the financial year. A budget doesn’t take into account the timing difference of earning income and getting paid later, nor incurring expenditure and paying later.

I’m GST registered. Why is it that sometimes I’m looking at GST inclusive amounts, sometimes not?

GST flows in and out of our bank – it is included in the gross receipts and payments; but when you budget, and then account for “Profit and Loss”, you use GST exclusive figures.

Why does Income Tax always takes me by surprise?

Income tax to be paid will be a cash outflow. If you can budget your expected taxable earnings, then you can predict your likely tax payments. Tax is paid in four instalments. Three deposits (called provisional tax) and the fourth payment (if any) will be a square up between what actually transpires as your tax bill, and the credit for provisional taxes already paid.  The benefit of budgeting allows you to predict your expected earnings  and manage the cash flows for provisional tax payments and adjust them if necessary. Overpaying provisional tax leaves money unnecessarily in the hands of the IRD; underpaying exposes you to punitive penalties and interest.

A common mistake is to forecast expected cash flows which include those asset purchases (subject to depreciation), drawings (for personal living costs), and tax payments, then look at how much (or little) cash is generated over the year, and then calculate tax on that figure! That is, there’s been a merger of the Cashflow forecast with the Profit and Loss forecast into a rather meaningless hybrid schedule.

For those with “lumpy” earnings it’s good practice to schedule out the monthly expectations of earnings/expenditure and the related receipts/payments (cashflow) so that you can tailor your personal needs drawings with your wants, and moreover see if an overdraft facility is needed to bridge the lean months whilst waiting for a positive cashflow to rebalance the books.

I’m scared of asking the bank for a loan!

Don’t be. Banks make money from their lending. If you can demonstrate to yourself and the Bank that you have a clear plan of your likely needs and how any loan will get repaid, then arranging such finance should be easy. And besides, bank finance is often much cheaper than hire purchase.

Cash flow and forecasting models look so foreign! Where do I start?

The internet has many detailed examples of Cash Flow and Profit forecast models. For example try http://www.business.govt.nz/support-and-advice/advice-mentoring/finance/financial-forecasts