One of the critical concerns of running a freelance business is managing the financial and accounting aspects. Managing your business finances is all part of the game, and ignoring it may lead to nasty surprises. Also, not knowing how much you are earning and spending makes it difficult to see whether you are growing in your career.
You may have many different clients, and it may be hard to track who’s paid, who owes you, when, and how much.
Regardless of whether you are starting out or want to start tracking your cash flow, the steps you need to take are not as difficult as you may think. Keep these tips in mind to manage the numbers involved in your business.
Have Different Business and Personal Accounts
One of the best business decisions you will ever make is splitting your business transactions into separate accounts. This way, you are able to track your income and business expenses for a more straightforward calculation of taxes to be paid.
Make sure that all monthly subscriptions are charged on the business account, instead of the personal one.
If you are still a newbie to freelancing, you’ll probably use a personal credit card for this, until much later when you have a business card setup. You can try and get your personal credit card that you’ll solely use for business transactions. This way, you can separate business and personal expenses.
Because it can be easier to lose track of how much money you are spending on a credit card, try and pay off the business credit card weekly.
Some big banks offer business banking, but there are other banking solutions for small businesses that cannot manage the fees. You can choose what is best for you, depending on your needs.
Choose the Right Accounting Software
Having the right accounting software will save you a lot of time and money, especially when you can’t hire an accountant. Bookkeeping becomes harder to manage when you are using spreadsheets, or pen and paper.
Small business accounting software is easy to use even for those people who are not financially-minded. Accounting software will help you to:
- Create and send custom invoices
- Set invoice alerts for you and your clients
- Follow up with late payments.
Before you sign up for one, you need to shop around for the right software. Some are specially tailor-made for freelancers. They offer features such as connecting to your bank account, filing taxes, real-time access to your financial data, and time tracking.
Setting up the software correctly is another important aspect. If you don’t understand how to, you should hire an accountant to set it up. You should categorize your expenses well so that they align. This will help you save a lot of time and money when filing your taxes.
Set Aside Tax Money
This step is critical. Remember, you are not an employee, so your tax isn’t deducted from your salary. Have a plan to put money aside for your tax bill. You will need a lot of discipline for this. Otherwise you can land in a lot of trouble.
Some freelancers have separate bank accounts for their tax bills. You can set aside at least 30% of your income to cater for this. Alternatively, your account software can also help you estimate how much you will pay to the federal tax authority.
Also, you will need to pay an estimated amount of quarterly taxes as a freelancer. Have that amount set aside.
Take this step seriously. The government is not lenient when you avoid your tax bills.
Have an Emergency Fund
An emergency fund is not just essential in your personal life, but business too.
Know what your monthly overhead costs are. Always set aside a few months’ worths of those savings. Freelancing is still unpredictable. It would be best if you always stayed prepared for a rainy day so that you can at least sort the essential bills.
Have your Clients Pay you Faster
All freelancers know how stressful it can be to not get paid on time. You have bills to be taken care of, and late payments can be a nightmare.
Sometimes, communication and sending reminders are not enough as the client might still default. This is why you should consider invoice factoring. With this option, an invoice factoring company pays you the amount owed in an outstanding invoice. The factoring company fronts you either the entire amount or a fraction of the due balance. They collect the payment once the client pays.
An advantage of invoice factoring is that you get cash when you need it, instead of waiting for your clients to pay. Some invoice factoring companies integrate with accounting software, which makes it easier to manage.
Hire an Accountant
You may not be able to hire an accountant at the beginning of your career, but you’d be surprised at how affordable one is. When you are struggling to keep your freelancing career afloat, an accountant can be beneficial and worth the cash.
An accountant can charge you on an hourly basis. You can pay for the services of a small business accountant for a few hours a month. The services offered can include:
- Sending invoices to your clients
- Following up on late payments
- Paying your business expenses
- Filing taxes
- Categorizing your expenses correctly
- Reviewing your bookkeeping reports
You can also temporarily work with an accountant if you still prefer to DIY your accounting. This will help you understand the importance of cash flow in freelancing and avoid bookkeeping mistakes.
Learn the Basics of Accounting
Understandably, accounting is not everyone’s cup of tea. However, some necessary skills will help you understand your freelancing career and how to make it thrive. Have some fundamental accounting skills at your fingertips. You will know how you earn your money, your expenses, and also how to pay your taxes.
You should make sure you understand the following financial statements:
- Balance sheets
- Profit and loss statements
- Accounts payable and receivable
When you know what’s going on with your finances, you become an intelligent freelancer. Even if you hire an accountant, understanding these essentials will help you make better business decisions. For example, you know whether taking a loan will be a good or bad decision for your business.
Besides learning the basics of accounting, you can also learn how to use accounting software. There are various online tutorials, videos and webinars to help you.
Accounting will always be part of managing a successful business. Even though managing your finances may not be the most fun part about being a freelancer, getting organized can help you save money and time. Remember that your freelancing business relies on the cash transactions in and out of your bank account.
Set your personal and business accounts apart so that you can track your income and business expenses. Always set aside your tax bills and have an emergency fund for the lean months. You can hire an accountant to help you follow up on payments and make your clients pay faster. Most importantly, sign up for accounting software.
These simple tips could even make your freelancing business even more profitable.