Everyone needs basic bookkeeping skills. We all have to manage finances in some capacity. Especially if you are a freelancer or small business owner, some bookkeeping basics must be maintained.
And yes, we know, bookkeeping is inherently dull. I can’t think of a business owner or freelancer who launched their career because they were excited about their accounting records. But it’s a job that must be done, and when it’s done well, bookkeeping can be the key to unlocking your growth.
Success in freelancing and business ownership is defined by your productivity. If you want to be even more productive and see real growth, follow these three bookkeeping rules.
Rule #1: Update your books regularly
The most important rule of bookkeeping is updating your records regularly—weekly or monthly at the least. Keeping current books will allow you to kill two birds with one stone. You alleviate the stress of tax season and give yourself a better vision of your financial progress.
If you can commit to maintaining your books regularly, the task will only take a few minutes here and there rather than hours or days at a time. Make sure you schedule your bookkeeping weekly, even set the alarm if you need to. Then, grit your teeth and get through it. Procrastinating in regards to your books will only cause you to dread doing them even more—a vicious, costly and time-consuming cycle.
Some freelancers and business owners hire an accountant to help during tax season, but these professionals only review your finances once a year. Consistent bookkeeping gives you a more immediate view of your business health and helps you:
a) Prep for tax day:
Not only will your reports and totals be ready to go, but you will also get your fair share of the money. Deductions like vehicle expenses and airfare are quickly forgotten if you don’t record them right away.
For freelancers specifically, maintaining current records reminds you to set aside 25-30% of your income for the self-employment tax, rather than scrounging for funds when taxes are due.
b) Plan for audits:
If you do have the misfortune of getting pulled for an audit, the process can be (mostly) stress-free if you prioritize year-round planning. Self-prepared tax returns with a Schedule C are often pulled for examination, so save yourself the trouble of a government audit by getting your ducks-in-a-row ahead of time.
c) Maintain financing options:
Small business owners should keep as many financing doors open as possible in case of emergency—which depends on accurate bookkeeping. This kind of data is crucial to lenders as they want to know about the actual financial state of your business, not the theoretical state.
Not to mention, you will look unprofessional if you try to solicit funds without precise knowledge of your current financial standing.
Rule #2: Use the numbers
The worst thing you can do with updated books is just let them sit there. If you’ve been proactive enough to maintain current records, do something with them! Let those numbers do more than just put you at ease; use the data to inform your decision-making.
a) Take advantage of financial reports:
Books provide a snapshot of your company’s economic viability and books that are outdated or inaccurate, give a “snapshot” that is out of focus. Reports that track your profitability over time (Income statements) and reports that tell you how much your business is worth (Balance sheets) should be referenced frequently to determine what the next steps are for your company.
If you do not have these reports available as you are making business decisions, you may miss a step moving forward. Accurate books allow you to confirm your transactions and make sure your money is going where you want it to go. Using bookkeeping data to create financial reports will provide opportunities to thrive.
b) Get paid faster!
Without regular cash flow, your business will fail. Current books help you to track down Accounts Receivable and expedite your invoicing cycles. The longer it takes you to straighten out your books, the longer you will go without money that is owed to you.
Particularly for freelancers and small business owners, collecting payment can be a real issue. Your client is legally obliged to pay you for the service you provide, but unless you know who owes you money and hold them responsible for paying you, your business will not function. You may never receive a payment if your books are not in order.
Additionally, you could miss payments of your own if your books are not up-to-date. One CEO said that hiring a bookkeeper saved his company $500-1000 in late fees per quarter.
Rule #3: Know your options
Bookkeeping is easier than ever—whether you go the DIY route or hire a professional.
a) Cloud-based accounting software:
You used to need a fancy filing system to keep your books. Nowadays, you need a tremendous cloud-based accounting program. It’s insanely easy (and incredibly secure) to organize everything digitally. Not to mention, there are many affordable options—compare industry leaders or check out small business alternatives.
Freelancers and business owners have a do-it-yourself mentality, and there are lots of excellent bookkeeping options that help you do-it-yourself and generate powerful reports. But, there’s also no shame in handing your finances off to a professional.
b) Hire a virtual bookkeeper:
If your business has grown, good for you! It may be well worth your time and money to invest in professional bookkeeping. Virtual bookkeepers are more affordable than traditional accountants but offer the same expertise and security. Investing in a professional gives you more time to do what you love.
c) Do what you love:
If keeping a budget or doing your books is the most exciting part of your work week, then maybe you should consider being the bookkeeper companies outsource too.
Bookkeeping does not require a formal certification or CPA title. You can make a pretty decent hourly wage also—people will pay you well if you do something they dread (and it’s better than cleaning toilets).
Whatever you do, don’t neglect your books. Doing a little bit here and there will make you a better business owner and will save you a lot of money and headache come April.