Do Freelancers need Bookkeeping?
Congratulations on being a freelancer! We are on our way into the gig economy and it seems you are on the cutting edge. As such, you have to manage lots of different tasks one of which is basic bookkeeping. Here are some tips to help you keep control of your daily transactions and accounts.
Bookkeeping is vital to your business (I know, I know......)
One of the more common areas of concern is actually getting paid. As a freelancer, you probably have a large list of different clients and that makes it very difficult to keep track of who owes you and how much.
If freelancers don’t get paid and aren’t independently wealthy, then they won’t be freelancing for long, so perhaps this is the most important function of them all - understanding basic bookkeeping and using basic bookkeeping tools. You should be able to keep track of invoices (who owes you), so you can collect payment. This also allows you to understand your cash flow and possibly when to expect payment.
You probably already have an accountant to handle your year-end tax filings and any financials that you prepare, but if you don't, please hire one now. Nevertheless, this is an annual look at your business, while Bookkeeping is on a daily, weekly or even monthly basis and gives you a more immediate view into what is going on inside your business.
(As a side note - an outsourced bookkeeper is an easy step in the right direction, if you find you are constantly running out of time to maintain your accounts regularly. This will free you up to spend more time on your craft or freelancing activity.)
Start with an Organized System
Organization is key. Lack of it and you will constantly struggle to manage your finances. So start with the end in mind.
- Begin immediately, as in as soon as you start freelancing. Don't put it off, or you'll find it hard to remember every past transaction and it will increasingly become more difficult to start.
- Find a friend that is an accountant, bookkeeper or CPA and talk to them. Ask them about online accounting software and other recommendations. Ask if they will look over your books after you get them setup.
- Setup your business on an online software package - some are free, most are very cheap (like $25/month)
- Attempt to do the books every week – this makes it really easy to stay caught up.
Keep records of key parts of your business
Key areas of your business should be tracked. This list is not meant to be all inclusive but gives you an idea and hopefully gets you to thinking:
- Hours spent working on client, or the # of jobs completed, for each client
- Cost per hour/per job for each client
- Business expenses (keep all receipts) & all payments you make, including bank transfers
- Payments or income you receive from clients.
If you have recorded all the above in your accounting software, then the software automatically (pretty much) will or can track or produce things like:
- Accurate invoices for clients
- Cash flow reports
- Accounts receivable reports – money owed to you
- Accounts payable reports – money you owe others
- Identify your best clients – as well as your worst
Lower your tax bill
Freelancer’s generally have trouble lowering their tax bill. Below is a list of common expenses that could be eligible to deduct:
- Meals & Entertainment
- Office rent
- Utilities (power, cable, phone, etc)
- Capital expenditure (computer, printer & phones)
- Mileage deduction or Vehicle maintenance if you use your car for business purposes
- There are others…
Please make sure to record the details of the above in your bookkeeping – more detail is better than less.
Set aside Tax Payments
You aren’t a regular employee therefore you don’t have tax payments to the State or IRS withheld from your paycheck. So, you have to make payments to the respective agency on your own. Normally this is done quarterly based on your expected income. Using reports from the software, you can estimate what the tax bill will be and put aside the appropriate percentage of the income each month. Then you will know you can cover the tax bill when it comes due. The last thing you want is a huge tax bill and not enough money to cover it within the given time frame.
If you are a freelancer (or small business owner), bookkeeping is a vital part of your business, whether you want it to be or not. It helps you keep track of income, expenses, plan your tax payments, and manage late paying customers. Perhaps above all it gives you a crisper view of the overall state of your business.
This is imperative, since it's easy to lose sight of the big picture when you're relentlessly in the weeds and working for various clients and just hustling to get the product or service out. Keep in mind though, with good bookkeeping you’ll have a well-defined understanding of income, expenses, business growth or reduction and conceivably most importantly cash flow. Otherwise, you will remain in the dark and possibly stay there until it is too late.
I hope this provides some value. I am happy to help - hit me at email@example.com