Freelancers love what they do. What many of them don’t love is two things: selling and accounting. Both are necessary… but they don’t have to be evil. Or feel like they’re a chore.
We’ve written a bunch about marketing your freelance services, but nothing about how to manage your company. So let’s do a little Finance 101.
Business vs. Personal Finances
When setting up your business you want to separate your business finances from your personal finances. Many freelancers when they first start out, just take what they earn and dump it into their personal account.
The problem comes when you want to start seeing exactly how much money you’re making and how much you’re spending on things that help you run your business. At that point, it’ll make perfect sense to set up a checking account in the name of your business and deposit checks from customers into the account and write checks for business expenses from the account. And pay yourself a salary from the account. Once your business finances are separated from your personal ones, you can start to track how well your business is doing from day to day or month to month.
The next step is to get a good tool to track your business’ income and expenses. Income is the money that is paid to the business from clients; expenses are the checks your write to pay business bills. I used Intuit’s QuickBooks for over a decade, and although I don’t think it’s a wonderful tool, it worked better than Intuit Quicken and Microsoft Money for tracking my business finances. There are now modern apps that are quite simplistic and can be ran in your web browser if your needs are quite basic.
Most accounting packages are organized around the idea that you have customers who you will invoice and vendors who you will hire and have to pay. When you invoice, you create an Accounts Receivable, which is a finance account that keeps track of the money that is owed to you. When you receive a service or product from a vendor and get a bill, you create an Accounts Payable, which is a finance account that keeps track of money you owe.
If you aren’t comfortable setting up the smaller accounting packages like QuickBooks, you should find an accountant or bookkeeper to help you do the initial setup and show you how to enter transactions when your business receives money or spends money.
I highly recommend getting an accountant before you have to get to tax season so that you can plan for the taxes that are owed before it’s too late to plan. Here’s a good posting on How to Pick a Good Accountant.
Once you have your accounting package set up, how do you figure out how well your business is doing? The most important report that accounting packages have is the Profit and Loss Report, which shows the money you’ve received less the money you’ve spent during a period of time. This report tells you whether your business has been profitable during a particular month or year, for example.
The other important reports will be the Receivables report — which shows you what invoices are still to be paid and how long ago you created the invoices — and the Payables report, which shows what money you owe. Combine the data in these reports and you’ll get a very clear idea of how well your freelance business is doing — and whether your customers are paying their bills fast enough so that you can pay your bills.
Yes, keeping on top of all that paperwork can be a pain, but without it, you’ll have no idea until it’s too late! whether your business is making money or losing money. What I do is to record all checks that show up immediately, leave all bills in a pile to be paid twice a month, and invoice immediately when I hit project milestones. And call any customer whose invoice is more than 45 days old.
Keeping up with all this paperwork is the surest way of making sure that you can keep your freelance business running long into the future.