Accounting for Freelancers: Making Sense of Your Business Finances

One of the most difficult things that many people grapple with when they first go self-employed is their business’s finances.

But as intimidating as dealing with your accounts can seem, it’s not actually that difficult. It’s true that things can get trickier once your business starts to grow (especially if you start to hire a staff), but for the most part, accounts are really just about organization.

So if you’re thinking of going freelance but the thought of dealing with the dreaded tax man strikes fear into your heart, don’t despair. It’s a lot easier than it looks, and this guide to accounting for freelancers will help you get started.

For the sake of this post, let’s assume that you’re just about to hang out your shingle as a freelancer.

Where do you start when it comes to organizing your business accounts?

Registering your business

The first thing that you have to do when starting your new business is register with the tax office.

But before you can do that, you have to decide what kind of business you’re going to run. Will you operate as a sole trader, or do you have you high ambitions and want to start as a limited liability company?

For most freelancers, it’s sufficient to be a sole trader. And regardless of where in the world you live, this is the easiest way to set up shop.

If you want to establish a limited liability company, there’s generally more paperwork involved. While many people assume that creating an LLC means that they are “safe” if the company goes under, this is not really the case. If you as a director are deemed to have been irresponsible with the company’s money, then it’s still possible that you will have to pay up if the company goes into liquidation.

I would advise anyone just going into freelancing to keep it simple at first and start as a sole trader. I’ve personally done both, and it’s much easier and more straightforward to be a sole trader.

Another option many people consider is forming a partnership. Be forewarned: If you’re venturing into business with someone else, you’re going to need legal advice and a strong contract. Partnerships are notoriously difficult and often lead to the breakdown of friendships, so I would approach this business model with caution and ensure that you choose your business partner for sound business reasons, not because they are a pal and it seems like a good idea.

Whichever option you choose, rules and regulations vary from country to country, so make sure that you check our all of the relevant documentation on the tax office’s website and if necessary, call the office directly for further advice.

Tax offices:

Keeping accurate records

As I mentioned earlier, the biggest hurdle to overcome when managing business finances is organization. It’s vital that you keep clear records both for yourself and for the tax man. You can do this with a variety of tools, including:

Spreadsheets
Small business accounting packages
Paper records

For most one-person businesses, spreadsheets are quite adequate, and they provide a simple and inexpensive way to organize your income and expenses. All you have to do is enter your numbers into the appropriate columns and create a simple formula to calculate your profits. (We’ll take a look at small business accounting packages a little later on.)

What records do you need to keep?

You should keep a record of all income and expenses that the business generates, including:

Office and stationery costs
Hosting accounts
Payments from clients
Payments to suppliers
Travel and accommodation costs when traveling to and from meetings with current or prospective clients
Capital expenditures such as computers, office equipment, and vehicles

As we do a lot of our day-to-day admin work on the computer these days, it’s a good idea to print off incoming invoices so that you can ensure that they are entered into your accounting system or spreadsheets and then filed for that particular month or year. At year-end, you can then check paper copies against your records and make sure that everything adds up. It’s also a good idea to file all small receipts and create a sundries or petty cash account for them, so that you don’t have to enter every single receipt for small amounts.

Backing up electronic records is essential, as you will need to keep them for a number of years in order to comply with tax regulations. This should go without saying, but I’ve repaired many a computer for users who are panicking because the hard drive failed, taking five years’ worth of stored accounts with it.

Accounting Packages

There are numerous accounting packages available for small business that can help to take a little of the drudgery out of the process. While spreadsheets are good enough for many people, and it’s easy enough to create invoices and quotes from templates, you may still want to invest in a small accounting package that does the sums for you, sends out invoice reminders and more.

For example, QuickBooks Online is a popular choice for many small businesses. At a cost of around $39.95 a month, it has more features than you’ll probably ever use, and the subscription covers five users.

I’ve found that the best way to decide on the right package for you is to ask others in your area what they use and why. If you open a business bank account, you’ll also find in many cases that the bank has its own accounting packages that you can use, sometimes free of charge.

You don’t have to pay for accounting software either. There are plenty of options that are free to use.

GnuCash is a popular choice and has everything you need plus a few advanced features such as stock control and customer tracking. It’s unlikely that you’ll need all of these, but it’s a good way of introducing yourself to accounting software.

The beauty of many of these packages is that you can export your records in a a format that you can just hand to your accountant at the end of the year.

Accountant or Not?

At some point you’ll have to decide if you need an accountant or if you will handle everything yourself. There’s no doubt that a good accountant can save you money, give you sound business advice and handle all of your tax affairs, but before making the decision, you have to take a good hard look at whether your business justifies the extra expense.

I have always done my own accounts until I formed a limited liability company, which does require an accountant is used at least once a year. It’s also a good idea to work with an accountant if you’re employing others, as the accountant can handle payroll and the other employer obligations that you have to the tax man.

But if you’re just starting out, I don’t think there’s a huge need for an accountant, as you won’t be generating a large amount of paperwork.

Business Plans

In an ideal world, you would have created a business plan well in advance of actually becoming self-employed. However, the fact is that most people don’t.

While it’s not essential, I would recommend that you create a business plan for the simple reason that it helps you focus on the strengths and weaknesses of your business. You’ll also find that a business plan is a necessity if you ever need to pursue investors or get a loan from a bank.

Your business plan should include:

Your business details and unique selling proposition
Market analysis
An analysis of your competitors
Details of who your ideal customer is
Start-up costs
Profit and loss forecasts
Identified risk
Staff details
Marketing plans
Pricing
Supplier and equipment details
Insurance requirements

This all looks very daunting, but it’s really nothing to worry about. More than anything it just takes research. There are also plenty of templates online which can help you to fill in your business plan. While some business plans are 50 pages long and very detailed, you don’t need to do this unless you’re looking for some heavy duty funding.

Start-up costs are simple to calculate. You’ll need to think about:

How much you’ll need to live on for the next six months
Equipment costs
Cost of suppliers and, if relevant, staff
Marketing costs
Office costs
Day-to-day costs such as telecoms charges

Profit and loss forecasting is a little trickier and inevitably involves some guesswork. However, you presumably know how much you’re charging, how many customers you have and how many expenses you have. You use these to calculate how much you have coming in and going out and can then make an educated guess as to how this will rise in the future.

So, if you’re going to implement price changes, then this can be taken into account, or if you’re chasing a large contract and intend to continue adopting larger contracts, then it’s reasonable to assume that these will pay off and include an estimated figure in your forecasts.

Final Thoughts

It’s easy to be overwhelmed by the thought of business accounts, dealing with the tax office, and keeping records, but there’s nothing to it really. Start simple: If you’re a freelancer working on your own, then a spreadsheet will more than likely suffice.

Where many people fall down is not keeping adequate records in the first place. Things start to slip through the cracks, and before they know it, they’ve got themselves in a bit of a mess, and they’re afraid to approach it as they don’t know how to put it right.

Remember that, while tax officials have a bad reputation among business owners, if you get in trouble with your finances, your best bet is to get professional advice and ensure that you keep the lines of communication open with officials and creditors.

Not an Accountant? How to Make Sense of Your Business Finances