How to build your contractor war chest

As an independent professional, at some point or another, you will likely find yourself between contracts. To manage these occasional slow downs, keep yourself cushioned against unexpected difficulties and potentially benefit if you later choose to stop contracting – you need to build and strengthen your war chest.

Previously in our ‘Thriving in Brexit’ series we briefly examined the importance of money management in periods of downturn. Here, we take a closer look at the importance of saving and maintaining a war chest to ensure your success in ‘dry seasons’.

A war chest is a metaphor for a collection (such as tucked away savings) intended to be used in a challenging situation. Building a war chest can be a valuable asset to ensuring your success.

Saving while times are good

We all know the fundamental rule of saving as an independent professional: save when you’re earning for times when you’re not. But for many of us, this is easier said than done. Contracting at times can feel unsteady, most contractors will experience times of boom and times of bust throughout their career. Ensuring consistent savings when work is flowing ensures we can survive in dry periods.

Naturally, saving requires discipline when dealing with your finances. However, as a contractor or consultant if you are consistently struggling with saving then it might be time to re-evaluate your fees. As an independent professional you need to ensure you are selling yourself appropriately. Remember, you are not a permanent employee; your fee is not just to pay you for the expertise and time you’ve provided but also to ensure you can support your business (including you as it’s employee) going forwards.

Many contractors have suggested that the best way to arrange your fees is to price yourself so you are capable of surviving on just two or three days pay a week. These days should be able to cover your essentials, ensuring you keep a roof over your head and remain in business. Anything you make from the additional days are instant savings for building and fortify your war chest.

How big should a war chest be?

‘A war chest at a minimum should allow you to survive without any work for 3 months. Really ensuring that it could last you for 6-9 months would be the safer choice.’
Matt Poyser, inniAccounts co founder and former contractor.

For many, a war chest is a constantly evolving goal. Examining your recurring expenses can give a clear picture of exactly how much you would require to keep you and your business afloat between contracts.

How should I be saving?

There are many techniques you can employ to ensure you are saving money. The easiest is to have a standing order – a set payment taken at a set frequency, say every month. A standing order can ensure you are consistently topping up your war chest without worry. You can always pause standing orders in down periods. Experts suggest people who save through a standing order are far more likely to have robust savings then those who save as and when. Ensuring you consistently put money aside will help to safeguard it from being used elsewhere in your business. Be sure you find a savings account where your war chest can accrue interest at a competitive rate. This will serve you far better then allowing your savings to sit idly in your standard account.

Other aspects of saving can be achieved through keeping detailed and accurate records, including receipts that allow you to claim for all reasonable business expenses. You could consider ‘going green’ in your dealings (using less energy means you’re spending less on energy) as well as searching for cheaper alternatives for expensive software and currency exchange savings. Some of the tactics you may have used for your personal savings, such as saving odd cash left at the end of the month or utilising smartphone apps, could also benefit your business savings.

Should I save within or outside my company?

If you have long term goals in mind, saving within your company will likely be the better option. This keeps money within your company, ensuring that in times of hardship your business can stay afloat. Retaining your savings may also benefit you when you later come to close down your company. You’ll be able to leave with the extra savings you’ve accumulated and a potential relief on your final tax bill.

By keeping your war chest as an asset of the company, you may be liable to pay less Capital Gains Tax. Entrepreneurs’ Relief means your qualifying assets (such as your war chest) will be taxed at 10% instead of the usual Capital Gains Tax rates of 18% or 28% depending on your income.

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