When it comes to accounting fundamentals, there’s a lot we could speak to—cash vs accrual method, assets = liabilities + owner’s equity, variance analysis—but I’m already putting you to sleep already, aren’t I?
Rather than get into the technical jargon of accounting (that may or may not really help you), let’s discuss some of the accounting and bookkeeping basics that make a real difference for freelancers.
Understand the Why
As a freelancer, you are responsible for every aspect of your business—SEO, marketing, budgeting, etc.—and with the mounting pressure to take on more projects and improve your craft, there’s no way bookkeeping is high on your radar.
The problem is, without accurate books, you won’t have an accurate view of your financial standing. Accounting provides a snapshot of your company’s financial viability and records that are outdated or inaccurate provide a “snapshot” that is out of focus.
Yes, bookkeeping is inherently dull, but the results of bookkeeping—they’re thrilling. There’s a thrill at the end of the month when balanced books show an actual profit or at the end of year when you’ve stayed within your budget or at tax season when you add up all your write-offs and you’re actually getting cash back instead of owing. This kind of invaluable financial data can only come from accurate books.
You put your time into the things you value most. If you truly value your business, you will put your time into your books and you will see financial growth because of it.
Separate Your Spending
The first step in simplifying your books is separating your spending. If you don’t separate your business and personal spending, it’ll be a nightmare come tax season.
So, go out and open a bank account for your business. It’s that easy.
Don’t worry about finding the best business credit card or filing as an LLC before you apply or stressing about the logistics (at least not at first). Just start by contacting the bank that you currently use and open a second account exclusively for business transactions.
This way your business’ income and expenses will be abundantly clear and easily traceable. Being able to see the inflow and outflow of cash all in one place—and not intertwined with your personal spending—will make reconciliation easy and help to produce beautiful financial reports.
Start Right Away
The most grievous mistake business owners (even the most experienced business owners) make with accounting is procrastination. As soon as you start freelancing, start bookkeeping.
If you’re just learning the ins and outs of your business responsibilities, and you’re a few months behind on your books, that’s okay. You can start fixing your accounting mess right now, today! It will take hard work, but soon you’ll get in the habit of updating your books regularly, saving you time in the long-run.
Set aside a little time every week (or at least every month) to mind your books. A few minutes every Friday is a lot better than a few hours—or even days—come April.
Besides, the longer you wait to categorize transactions, the less likely it is that you’ll actually remember what those transactions were for. Then you’ll have to dig through old records and receipts, wasting even more precious time that could be invested in the business tasks you love.
Just grit your teeth and start fixing your books. Your business will thank you.
Know Your Tax Requirements
One of the greatest draws to freelancing is independence. But with great independence, comes great responsibility—including setting aside money for savings, insurance, retirement and yes, taxes.
Small business owners and freelancers are subject to the self-employment tax, which can also include making estimated quarterly payments. Be sure to stay on top of your tax calendar so you don’t incur any extra fees or penalties.
Freelancing does have its tax benefits as well. If you have kept accurate records year round, you will be able to deduct business expenses (including travel, office space, equipment, etc.) by using a Schedule C (Form 1040). Remember that you will need to provide concrete evidence that these write-offs apply to your business, which proper bookkeeping will provide.
Interpret Your Reports
I started by saying I wouldn’t bore you with the jargon, but there are a few basic accounting terms that will be useful for you to know.
The accounting equation, which I mentioned above (assets=liabilities+owner’s equity), is represented on your “Balance Sheet.” What matters most on this report is that the accounting equation is, well, balanced. The total of your assets needs to equal the total of your liabilities and equity combined. If these numbers are not identical, you will have inaccurate books and file a faulty tax return.
Profits and losses are accounting terms that business owners tend to be pretty familiar with. Your “Income Report” shows your total sales and expenses over a period of time, resulting in your gross profit. Your net income, or “bottom line,” is what you pay taxes on. It’s the heart and soul of your business.
It’s also important for freelancers to understand that profit does not necessarily equal cash on hand. Your “Cash Flow Statement” combines data from the Income Report and Balance Sheet in order to give you a summary of your cash position.
These three reports are of the greatest value to freelancers. And the beauty is, if you’ve kept accurate books, most accounting products will produce the reports for you. You don’t have to do any complicated math to view your financial standing. You just have to categorize transactions; let your software do the heavy lifting.
Use the Software
Many accounting products offer a free tier for freelancers, so take advantage of that! Don’t try to track all of your numbers in a spreadsheet. I mean, if you haven’t been recording any numbers then sure, start with a spreadsheet. But know that there are smarter, easier, and way prettier options out there.
Cloud-based applications are the norm today and they are incredibly secure and easy to organize. These software products can be accessed any time of day, from any platform and receive automatic updates.
You could also consider a desktop software, but when you compare platforms (like QuickBooks Online vs Desktop) it’s clear that most online options have the power of a desktop alternative, with the accessibility of the cloud. To me, it’s a no-brainer, especially for freelancers who are often on-the-go.
Hire a Professional
If even after understanding the fundamentals of accounting, you are considering hiring a professional, there’s no shame in that (as long as you have the budget for it). However, even if you do outsource bookkeeping or accounting, you should still be involved. You need to know what’s happening in your books, even if someone else is managing them.
If you do hire a professional accountant, know that you can always save money on their services by handing over pristine books.
You Got This!
Accounting and bookkeeping don’t have to be scary. It really comes down to knowing where your money is coming from and where it’s going—and that’s a business imperative for every freelancer.
Jaren Nichols is Chief Operating Officer at ZipBooks, free accounting software for small businesses. Jaren was previously a Product Manager at Google and holds an MBA from Harvard Business School.
PHOTO: Pixabay / CC0 Public Domain