Value the importance of bookkeeping in your business
One of the most common concerns of freelancers is getting paid. As a freelancer, you may have many different clients. It can be hard to keep track of who owes you money, when, and how much.
That's why it's important for freelancers to understand basic bookkeeping and use bookkeeping tools. You’ll be able to keep track of outstanding invoices, so you can collect payment. You won't miss out when billing your clients. And you’ll be able to quickly see the state of your cash flow.
You probably already have an accountant. If you don't, you should hire one now. But an accountant might only review your finances once a year. Bookkeeping gives you a more immediate view, especially when you make updates every day. If you find you run out of time to maintain your accounts regularly, then investing in a bookkeeper will free you up to spend more time on doing what you love. Here's how to make bookkeeping work for you.
Create an organized system
Organization is vital for good bookkeeping. Without it you'll struggle to manage your finances. So start as you mean to go on:
- Begin right away, as soon as you start freelancing. Don't put it off, or you'll find it hard to remember every past transaction.
- Talk to a bookkeeper and seek their advice. Ask them which software they use. It makes life much easier if you both use online accounting software. That way you can share data easily and securely, from anywhere.
- Use a recognized accounting system. Good accounting software guides you through standard bookkeeping steps. All you have to do is fill in the details and, in the beginning, have it checked over by a bookkeeping or accounting professional.
- Set aside time to do the books every week – if you fall behind, you may struggle to catch up. Hiring the right bookkeeper can make all the difference to your business.
Keep records of key parts of your business
Parts of your business you should record include:
- your hours spent working, or the jobs completed, for each client
- the cost per hour or per job for each client
- your business expenses (and keep all receipts)
- all payments you make, including bank transfers
- all payments you receive from clients
Record all of this in your accounting software. Modern accounting software can use this information to:
- generate accurate invoices
- produce cash flow reports
- keep track of money owed to you (accounts receivable)
- keep track of money you owe to others (accounts payable)
- identify your best clients – and your worst
Accurate bookkeeping has other benefits. For example, it means you are prepared if you are ever audited by the government. It can also act as proof of income when you're applying for a home loan or other credit.
Offset your expenses against tax
If you’re a freelancer, you can offset many of your expenses against tax. Rules vary from one country to another, but usually you can offset things like:
- travel expenses, though not to and from a regular workplace
- office rent, including a room in your home
- power and utility bills
- capital expenditure on items such as a computer, printer and phone
- internet and phone bills
- vehicle maintenance if you use your car for business purposes
- client entertainment expenses, though some restrictions apply
So make sure you record all of these details when doing your bookkeeping. A data capture app, like Hubdoc, can integrate with your accounting software to make this process simpler.
In most cases you can only offset a proportion of your expenses. For example, you could offset the rental cost of a room in your house, but not the whole house. And you could claim fuel costs, but only for the distance driven on business.
Talk to your bookkeeper to find out what you can offset, and beware of pitfalls. Let's say you bought your home with a loan. You might be able to offset part of the interest payments against tax. But if you do, you may find you have to pay that amount back when you sell your home.
Get paid faster
One of the big benefits of having up-to-date accounts is getting paid faster. Collecting payment is a real issue for many freelancers, but bookkeeping can help.
- Invoice promptly and regularly: It only takes a few minutes to create and send invoices via email. Since you've already input the necessary information, there's no need to do it all again. Just click and send. Learn more in our guide to invoicing.
- Identify late payers at a glance: With up-to-date accounts, you can easily identify late payers. An aging summary report will show you who owes what, and how overdue each invoice is. You'll quickly discover which clients are problematic.
- Set reminders – for your clients as well as for yourself: You can set reminders that notify you when an invoice is approaching its due date. With modern accounting software, reminders can also be sent to the client – automatically.
- Chase – politely but firmly: If you've completed your work to the agreed standard, your client is legally obliged to pay you. So don't be embarrassed about chasing payment. After all, it's your money.
Put money aside for your tax bill
Unlike a regular employee, your tax isn't deducted from your pay packet. That means you need to plan to put money aside for your tax bill and you need discipline. It's important to get into the habit so you don’t get caught out at tax time.
Some freelancers set up separate bank accounts just for tax payments. Using reports from their accounting software, they can estimate what their tax bill will be. They put aside the appropriate percentage of their income each month. Then they know they'll have enough money to pay the bill.
You have to take this seriously. The government is unlikely to be lenient if you fail to pay your tax bill. So put the money aside and record it when doing your bookkeeping.
Make bookkeeping work for you
If you’re a freelancer, bookkeeping is a vital part of your business. It helps you plan your tax payments, keep track of expenses, and manage late payers. But above all it gives you a clear view of the state of your business.
This is vital, since it's easy to lose sight of the big picture when you're constantly working for multiple clients. With good bookkeeping you’ll have a clear idea of cash flow, income, expenses and business growth. Without it, you'll be struggling along in the dark.
So take control of your bookkeeping. With the right software, it'll give you invaluable insights into your freelancing business.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.