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No matter what stage of your freelancing business you’re in, whether it’s two months or two years, staying on top of invoices and bookkeeping can be tricky.
Financial record-keeping is a crucial part of your business, and creating good habits from the get-go will ensure you can focus on what matters: freelancing. Staying on top of your finances will also help limit financial stress.
Why accounting matters?
Regardless of what industry you’re in, accounting matters. Why? Tax reasons, to start with. But also, those bills you need to pay – the money has to come from somewhere. And understanding how to manage that money is absolutely critical.
When it comes to tax compliance, the laws vary from country to country. But usually, there are penalties if you lodge your tax return late, interest may be accrued and in some countries, the penalty may even be jail.
The foundation of your tax knowledge lies in your ‘books’. No, not literally the books on your shelves, it means properly and correctly recording all financial transactions – invoices and expenses – related to your business. Importantly, everything needs to be traceable.
And then, there’s the small matter of actually creating a profitable business. If you’re not on top of your numbers, how will you honestly and accurately track the financial success of your business?
Invoicing 101
One of the most important parts of any freelance business is knowing how to invoice properly. There is a range of invoicing tools available via online accounting software, including Xero and Quickbooks. There are also templates available meaning you can create your own invoice if you feel Excel-savvy.
No matter which way you decide to go, creating invoices should be quick and simple, easy to send, look professional, and easily tracked. Remember, you also want to make it as easy for the customer to pay you as possible. There are even some invoice options that allow customers to pay within the invoice itself.
If you can, it’s also a good idea to take at least part-payment at the beginning of every project. This ensures you are covered financially should the project be stalled and also helps reduce the risk of delays in getting paid, or not getting paid at all, at the completion of the project.
Separate your bank accounts
If you’re just starting out, you may think you’re too ‘small fry’ to have separate bank accounts, but rest assured it’s absolutely imperative that you can separate your personal expenses from your business ones. Not only does it make tracking those invoice payments much easier, but it also separates any business expenses from your personal ones, meaning nothing comes directly from you, only your earnings.
This includes any monthly subscriptions that are linked to your freelance work, any office expenses such as printers, paper, and toner, software, and hardware, such as computers, cameras, or smart devices. If you work from home, business expenses can even cover things like electricity, internet plans, and even a portion of your mortgage or rent.
Something like a Visa Debit account may be a good option here as it’s a bank account but you still have the option of using it as a credit card to automatically put payments through if you wish. Separating your bank accounts means you have a clear understanding of what expenses are business-related because they’re not getting mixed up with your personal ones. Remember though, to keep your relevant receipts so you have proof of payment. Take photos of any physical receipts as these can fade over time.
Keep a buffer
It’s very tempting to spend your earnings, but resist! As you become more experienced as a freelancer and the money starts to roll in a bit faster, there may be some extra cash in your account. Don’t waste it.
Make sure you’re keeping some aside for taxes. There is no employer taking tax out of every invoice you’re paying. That’s all on you. So you need to make sure you have enough money to cover any tax bill if and when it comes.
By creating a buffer, also gives you a bit of flexibility in deciding who you work with. If you have enough money in your account, you may be able to say no to clients who come with a difficult reputation.
Or you could choose to work fewer hours so you can focus on the strategy part of your business, spend time with your family or even work on your physical and mental health. A good idea is to put this money in a high-interest savings account. It will sit, protected, and earn interest at the same time.
Keep track of your finances
One of the most important elements of financial planning as a freelancer is keeping on top of your income and expenses. It’s not enough to send off an invoice, wait for it to be paid, move it around to ensure the right amount is going into your savings account, and then sit back and relax.
You need to have a thorough understanding of all of your expenses, monthly or fortnightly, to ensure you have enough money to cover those. And keep track of all of your invoices. Sometimes, there’s a delay in getting paid. If you don’t chase those, there’s no one to do that for you.
Being a freelancer is a wonderful way to take control of your life. You set your hours, what work you take on, and how much. But it does come with responsibility, specifically financial ones. There’s no bookkeeper or financial controller doing the hard work for you. Make sure you understand what to do and how to control all the finances and you’ll be able to grow your business in no time.
