As a freelancer, your most important concern is getting paid. If you have multiple clients, your next objective is to find out which ones owe you money. You also need to know how much you are owed and when you should collect payment. It is essential that you don’t lose any outstanding invoices or discover that you cannot collect your receivables. In summary, to enjoy the benefits of a stable cash flow, you must ensure that you don’t miss out on any payments from your clients.
With this in mind, all freelancers should find the time to learn the basics of bookkeeping and related tools. Whilst it is likely that you will have an accountant, you probably only engage their services once or twice a year. In addition, their duties are probably limited to preparing income tax returns and reviewing your finances. By contrast, bookkeeping can give you a quick update of your daily financial activities. If you cannot find enough time to maintain your books, then it’s probably a good idea to delegate this role to a bookkeeper. This will also give you more time to focus on what you do best – working for your clients. Here are some tips on how to do bookkeeping properly.
Organise your books
If you don’t organise your accounts, you will probably struggle with your finances. So begin by:
- Recording every transaction (and don’t put this off as you will find it difficult to remember at a later date).
- Seeking advice from a professional bookkeeper. For example, ask what type of accounting software they use.
- Setting aside a time to do your books every day or week. If you don’t do this, it can be difficult to catch up. Nevertheless, if this is just not possible, consider employing the services of an appropriate bookkeeper.
How to choose the right bookkeeper or accountant
This blog discusses how finding the right professional to handle your accounts will depend on your individual requirements. For example:
- Are you hiring one to save you time?
- Do you need someone to monitor your daily financial transactions?
- Are you looking for someone who can make sense of the numbers generated by your trade?
- Do you want a finance professional that has experience and exposure in your industry?
- If you had to choose, would you prefer one who is qualified or experienced?
Answering these questions can enable you to select the best professional to help you keep your accounts current and accurate.
Remember, there’s no need to hire a bookkeeper or accountant on a full-time basis; you can hire them per project or by the hour. This approach can also help you keep your costs down.
Keep detailed records of essential aspects of the business
Your financial records should at least include the following:
- The billable hours worked or completed for every client
- Rate per hour/job for every client
- All your business expenses, including the receipts
- All payments made, including bank transfers
- Payments received from all clients
You can record all these transactions using accounting software. You can then use it to generate:
- Accurate invoices
- Cash flow reports
- Information on how much money is owed to you, e.g. receivables
- Data on how much you owe, e.g. payables
- Information on your best and worst clients
Maintaining accurate accounts will undoubtedly be beneficial to you. For instance, you will be prepared for a government audit. You can also use your accounts as proof of income when applying for loans or credit.
Make a list of expenses for tax purposes
You will need to offset your costs to reduce your tax liabilities. Rules can vary but the following costs are often the ones that can be deducted.
- Travel expenses, although this deductible may exclude going to and from work
- Rent expenses, which can include a room in your house
- Utility bills, such as power and water
- Capital costs, such as computers, printers and smartphones
- Internet and phone bills
- Vehicle expenses if you are using one for business purposes
- Expenses for entertaining clients, although some restrictions may apply
Often, you can only apply for a portion of your costs. However, you still need to record all your expenses in detail. For example, you can claim for a room’s rental cost but not for the entire house. Also, you can claim fuel expenses but only for the distance driven on business trips.
Make sure that you seek advice from your bookkeeper or accountant to determine which expenses are allowed for tax purposes. This will help you avoid any legal pitfalls. For example, if you have bought a house using a loan, you can claim the interest payments as a tax deduction. However, you may pay this amount back once you have sold the house.
Ensure your invoices are paid promptly
Collecting payment from clients can be difficult if your accounts are not up to date. By using bookkeeping tools, you can:
- Issue invoices regularly and punctually – Creating and sending an invoice via email only takes a few minutes. If you have an invoice template, it’s easier to fill in the essential information.
- Set and send reminders – With the help of accounting software, you can remind yourself and your client about the due date of an invoice. You can also send automatic notices to your clients.
- Undertake follow-ups – Once you have completed the job based on the agreement, the client is bound to make payment. However, if they don’t, you are within your rights to follow up on the matter. Make sure that you remind them politely but firmly.
Establish a special fund for tax payments
If you are a freelancer, your tax won’t be deducted from your pay. Therefore, it’s your responsibility to plan how much money you will need to set aside to pay your tax liabilities. This will require discipline on your part. Remember, you will face stiff penalties for not paying the correct amount of tax.
You can set up a bank account that is used solely for paying tax bills. To help you estimate a reasonable amount, consider using accounting software. It is essential that you take tax payments seriously. Failure to do so can result in penalties and fines.
If you are a freelancer, you should regard bookkeeping as a necessary part of your trade. It can help you make the correct tax payments, monitor your expenses and even manage the late payers. Ultimately, bookkeeping is an effective way of obtaining an accurate picture of your business. It also pays to invest in and use suitable accounting software as this can provide you with critical insight into your freelance trade.
Written by Nishi Patel, founder of Northants Accounting.