Start a freelancing business

Guide to Bookkeeping for Freelancers Part 1

By Brennan Dunn

In part one of this two-article series on freelance business finances, we will focus on businesses that are just starting out.

If you’ve been in the game for a while, feel free to skip to the second post when it becomes available.  No matter what stage your business is in, improved financial record-keeping and great habits can save you time and stress while opening the door for growth.

Today, we’ll look at why records are important, how to build your war chest, and how and when to hire an accountant.  We’ll also discuss the criteria you should use when selecting a software for invoicing, receipt storage, and accounts management.


Why should you worry about accounting?

There are two primary reasons to get your accounts in order.  These are tax compliance and the desire to run a successful business.

As far as your tax obligations go, the penalties for non-compliance will vary from country to country. Usually, there are late lodgement penalties, interest, and in some countries there can even be jail time for tax avoidance.

It can take years for the tax authorities to investigate you, so if you’ve avoided paying taxes for a few years and haven’t heard from them, it doesn’t mean you’re off the hook.

The foundation of tax compliance and knowing your numbers is having an accurate set of ‘books’. That means properly and correctly recording all of the financial transactions in your business. You’ll want everything to be traceable.

Avoiding tax penalties is a good reason in itself to get on top of your accounting, but you should also have some internal motivation.

Do you want to run a successful business and achieve your financial goals?  No matter what those goals are, you need to be on top of your numbers.


Getting paid


The most important thing when you’re just starting out is getting paid. You have probably figured out that to get paid as a freelancer, you generally need to send an invoice.

There are a number of invoicing tools out there and all accounting packages should also have this function. Some options include:

  • Freshbooks
  • Word Document
  • Wave
  • Xero
  • Quickbooks

(See DYF’s complete list of best invoicing software for freelancers).

No matter which tool you use, it needs to be easy to send the invoice, look professional, and you also need a quick way of tracking whether your customer has paid you.

You should make it as easy as possible for customers to pay you. If at all possible, give them the option to pay within the invoice itself.

A tool like Xero has the ability to add payment gateways to your invoices. This means a customer can open your invoice and then click through to a payment screen where they enter their credit card details and pay your invoice immediately.

Take full payment or part payment at the beginning of every project rather than at the end to reduce the risk of delays in getting paid (or not getting paid at all).


Separate business and personal bank accounts

When it comes to preparing your financial records you’ll be thankful for splitting out your business transactions into their own separate account.

Check that your monthly subscriptions are all charged to a business account rather than a personal account.

If you are in the early stages of your business you might use a personal credit card for this until you have a business card setup. At least try to have a credit card that is used solely for business transactions since this will make it much easier to differentiate between personal and work expenses.

It can be easy to lose track of how much you are spending on a credit card. Something that can help you to stay on top of this is to pay off the business credit card weekly.

This may not be possible if you need the credit, however, I would question whether it is wise to rely on credit to run a freelancing business.



Reducing expenses

We’ve been talking about the importance of cash-flow and following up on payments owed.

As well as increasing revenue or improving the speed at which customers pay you, another option for improving your buffer of cash is to reduce your expenses.

To start, you need a list of all of your monthly and yearly expenses. If you have an accounting system then this will be fairly easy to identify.  By running a general ledger report, you’ll be able to see profit and loss totals for the year and then running transaction listings for each expense line.

Many of you may not have an accounting system at this point. If you don’t have a list of your expenses then I would recommend exporting your bank statement(s) to a spreadsheet and going through that.

Often you will have some recurring subscriptions that you are no longer using or don’t really need. Start by canceling any subscriptions that you don’t need.

This process highlights the benefit of having accurate reports that allow you to easily access and review account information on a regular basis (monthly / quarterly).


Receipt management

In the section above you went through an exercise of reviewing your expenses and cutting out anything that you didn’t need.

Another side to expense management is that most countries will require you to keep evidence of business purchases in the form of a receipt.

There are many different options for storing receipts, but the most important thing is that you have a system!

Some of the top receipt management tools include:

  • Hubdoc
  • Receipt Bank
  • Shoeboxed

These tools all cost money, so in the early days of business, it is fine to use something like Google Drive or Dropbox. I do recommend that you schedule 30 minutes in your calendar every week to stay on top of this.

Physical receipts can fade or be lost over time so I recommend saving everything in the cloud in one place.


Savings – war chest

Now that your customers are paying you faster and you’ve cut some of your expenses you should have some extra cash in your bank account.

Don’t spend it!

Put this money aside in a high-interest savings account so that you are saving for taxes and also setting aside a buffer to give you options. More on this later.

The bigger the buffer you have in your savings, the more freedom you have. You could choose to decline work with a difficult client and work ‘on your business’ instead, or you could choose to work fewer hours so that you can improve your health and fitness (resulting in better productivity and happiness). For now, just hang on to it and let it build interest.

How do you increase your ‘war chest’?

Some people were lucky enough to build up their personal ‘war chest’ while they had a full-time role, however, this isn’t necessarily the majority.

We looked at trimming back business expenses earlier, but is there anything you can do to trim back personal expenses?

The lower your weekly living costs, the less you need to earn per week to survive, and the more you can focus on building your freelancing business so that it serves you.

For example, Tom’s weekly living costs are $500 and John’s are $1,500. John may need to take on the bigger client who pays well but sucks up a lot of his time. On the other hand, Tom can choose not to take that job and can spend that time working through the Double Your Freelancing Rate pricing course to improve his business.

Time spent learning how to run a ‘roadmapping session’ or how to implement value-based pricing are the activities that will help Tom take his business to the next level. This is described by some as ‘working on your business’, rather than in it.


Preparing accounts

Benefits of using accounting software

Most accountants will tell you that you need accounting software straight up.

I have a more realistic approach to this and understand the cost v benefit of accounting software might not be there if you’re only generating a few thousand of revenue a month.

Simple accounting records can also be kept in a spreadsheet. The downside to this is that using a spreadsheet can take longer and be more prone to error. Let’s look at some of the benefits of using accounting software:

  • Improved accuracy due to less manual intervention
  • Better reporting as there are many standard template reports in accounting software
  • Faster processing due to automation within the software
  • Easier to collaborate with your accountant

While there are many benefits to using accounting software over a spreadsheet, it is also important to consider whether you can justify the additional cost.


Is it the right time for me to invest in accounting software?

Here are some things to consider in working out whether you are ready to move to accounting software:

  • What are your compliance requirements and what does your accountant need?
  • Would your accounting fees be lower if you prepared these records in a format that is easier for your accountant?
  • How do you assess the performance of your business each month?
  • How long does it take to prepare these reports?
  • How fast do you expect this business to grow?

As a rule of thumb, if you expect to be turning over at least $100,000 in revenue within the next 18 months then I would recommend investing in accounting software. You should also talk with your accountant to work out the best time to move your finances into it.


Choosing the right accounting software

If you are going to get setup on accounting software I recommend going straight to a full accounting solution like Xero or Quickbooks.

The reason for this is that, while a tool like Wave is a good invoicing solution, it is missing many of the features of a true accounting package. If you are going to put the effort into setting up and learning a software package then it would be better to do this once rather than twice.

My personal preference is Xero because it has been intuitively designed for non-accountants, but also provides me all of the advanced features that I need as an accountant for online businesses.

There is a more detailed analysis of how to choose the right accounting software in the next section of this series.


Spreadsheet tips

If you are using a spreadsheet make sure you have business transactions running through business bank accounts and not your personal account.

This will save you hours when it comes to preparing the spreadsheet as you won’t need to go through a whole bunch of personal transactions, you can just import the transactions from your business account.


Paying taxes

In this world, nothing can be said to be certain, except death and taxes. — Benjamin Franklin

Preparing tax returns is a specialised skill and for most freelancers, it isn’t worth the time investment in learning to do this themselves.

Here are some tips to help you find the right tax accountant.

  • Industry – Do they regularly deal with people running similar businesses to yours?
  • Communication – do they prefer emails or phone calls and how promptly can you expect replies?
  • Registered – If they are going to complete your tax return, your accountant must be registered.
  • Relationship – are you looking to build a long-term relationship and could you see yourself working with this advisor for the next 5 years as your business grows?
  • Junior staff – will you be working with the advisor you have the initial call with or will one of their junior staff be managing your tax? If so, will you be communicating directly with the junior staff member, and what is their level of expertise?
  • Fees – how do they calculate fees?
  • Referrals – a good way to find a trusted accountant is to ask around within your network for recommendations. This is especially useful if you have colleagues who run a similar business to you.


Tax Entity When Your Business is You

The best structure when you are first starting out will depend on the country you are operating in. Many countries have a ‘sole trader / sole proprietor’ or similar designation which essentially identifies you as an individual operating a business.

When you are talking with your accountant about taxes it is worth asking what entity they recommend for you.

There are a few reasons to use a more complex structure, chief amongst them being tax minimisation and risk management.  You can find much more detail about entity designations by following the links at the end of this article.


What Comes Next

We’ve covered a number of important bookkeeping and accounting topics in this article.

Here’s what you can look forward to in Part 2:

  • Accounting Software: Essential features and how to optimize it
  • How to hire a bookkeeper and what you need to ask them
  • How to read your reports and understand your numbers
  • Stepping up your relationship with your tax accountant

Make sure to look out for the next article in this series which will extend on some of the accounting and bookkeeping topics covered in this post.


For further reading, Meryl recommends these resources:

Bean Ninjas post on Australian business structures

Bean Ninjas guide to US business structures

For anyone just starting out Dan Norris’s book The 7 Day Startup


Meryl Johnston is a Chartered Accountant, entrepreneur, and surfer! She founded Bean Ninjas in 2015 and within 2.5 years scaled the business to a team of 10 with accountants in Australia and the US.  Meryl is based out of Australia’s Gold Coast.