So, you’ve decided to try your hand at freelancing!
Among all the excitement of getting your business up and running, setting up your financial records might get lost in the shuffle.
It is important that you start your business off on the right foot, so here are some suggestions for setting up your freelance financial records and keeping them organized.
As a freelancer setting up your financial records might get lost in the shuffle.
Financial Record Keeping Set-up
Before we dive in and start keeping records, there are some decisions that you will need to make in regard to your financial record keeping. Don’t worry, these shouldn’t be tough decisions, and you can change your mind at any time.
It’s best to make these decisions based on your comfort level, not what you think you should do.
Electronic vs Paper Files
Do you prefer to keep all your records electronically or would you like to have paper copies of everything?
Both have advantages and disadvantages. Electronic files are easily accessible (they can be stored in the cloud, so you have access anywhere), there’s no filing cabinets required, and by not printing everything you save trees. Paper files can be beneficial as well, especially if you are one of those people who like the feel of paper in your hand.
Both types of files are subject to dangers such as fire or loss of data. You can pick the type you are more comfortable with or go with a hybrid system that has some of both.
Simple vs Complex
The type of records you need to keep, and the system to keep them organized, will depend a lot on the type of business that you are involved in. If you are selling products, you will have to track inventory, shipping, orders, payments, etc.
This is going to require more documents and more recordkeeping. On the other hand, if you have a simple service business, such as a freelance writer, you won’t have much to track except your customer invoices and payment receipts. You can always start simple and add things as your business grows.
Spreadsheet or Software
This decision involves how you will be recording the financial transactions that take place in your business. A simple spreadsheet, similar to a check register, is a good way to start out.
You simply record your expenses in one column, deposits in another, and then add a short description for each transaction so you know what it was for. If you think you’ll have more to track, or are comfortable with financial software, you might consider investing in some.
The software will make much of your recording tasks easier, and reporting is a breeze. Setting up the software to start out can be tricky, so if you aren’t comfortable doing it, hire someone who is experienced to help.
What to Track
The simple answer is that you want to track any financial transaction that takes place in the course of doing business. Generally, there are three types of transactions you’ll need to record.
These are expenses you incur that are part of your normal business activities. Here are some examples of expenses you will need to track:
- Cost of goods sold – the materials you buy to make the products you sell
- Office supplies
- Insurance – business and personal health/dental/vision
- Education and conferences
- Hardware or tools – computer, printer, equipment, hand tools
- Software – accounting, design, website
- Office rent
- Website hosting and domain name
- Email service
- Advertising – social media, internet, print
- Printing services
- Postage or shipping
Any money you receive in exchange for your products or services needs to be recorded. You will want to keep copies of each invoice you send out, as well as proof the invoice was paid (copy of the check or transaction printout from the bank or payment service).
You’ll need to record when each invoice is paid and keep track of invoices that haven’t been paid so you can follow up with your customers.
When you are just starting out as a freelancer, you probably won’t have any employees.
However, you still need to pay yourself from the proceeds of your business. Taking money from a company you own as payment for your work is called taking an owner’s draw. Anytime you take money from the business and put it in your personal account, you will need to record this as a draw.
You’ll also be responsible for paying self-employment taxes, so you’ll want to track those as well.
If you do end up having employees, it is best to use accounting software to calculate all the required taxes and withholdings instead of trying to do it by hand.
What Not to Track
Personal expenses and income do not belong in your business records.
Your business financial records should only contain expenses and income related to the business. What do you do if you accidentally charge your coffee to your business account? When entering the transaction in your records, record it as an owner’s draw.
You essentially paid yourself with a coffee.
How to Keep Things Organized
Set up files or folders for each type of record you are keeping, whether they are electronic or paper. You should have files for each calendar year to hold things like:
- Bills and receipts for expenses
- Invoices to customers
- Payment records
- Bank deposits and bank statements
- Tax payments and returns
You’ll also want to set up some permanent files (not yearly) to hold all of your company information (articles of incorporation, tax identification number, etc.) and your bank and credit card account information.
Make sure you have a record for each transaction that includes back-up to prove what the transaction was for. This should include receipts, invoices, check copies, etc. More back-up is always better than less, especially at tax time.
Use software that you understand and are comfortable with.
Yes, it’s a good idea to learn a new skill and test your abilities, generally.
Don’t do it with your financial tracking! You need to focus your energies on your business, growing your business, and making money. Don’t try to add learning an accounting program to your already full plate!
Keep up with your record keeping.
Don’t let records sit for three months before entering them into your system. The best rule of thumb is to do your financial work at least monthly. The arrival of your bank statement is a good reminder to get your records updated.
You will have to record sales and take in payments more often, of course (at least we hope!). Otherwise, work out a schedule that is good for you based on how much information you want as a business owner and the pace of your transactions.
Consult with a CPA or a tax advisor if you have questions or aren’t comfortable keeping business records.
They can usually answer your questions quickly and set your mind at ease.
Country and state rules and regulations vary, so if you are searching for answers on the internet, be wary. What works for one situation is not necessarily going to work for everyone.
If financial record keeping isn’t your thing, ask for help or hire someone else to do it.
You need to focus on your business and your passion, and financial records are too important to leave to chance.
Bookkeeping companies can help you keep everything organized and up to date or hire another freelancer who has the skills and experience you need.
Finances Aren’t Trivial
The most important thing to remember is that finances are very important to your business.
They are the very reason you became a freelancer – to make money.
Make sure that you are recording all your transactions in a way you feel comfortable with, and don’t be afraid to ask for help. Keep a copy, whether electronic or paper, of each business expense and income transaction.
This will help you immensely when it comes time to file your taxes.