Thanks to ever-advancing technology, freelancing has become more popular in recent years. The COVID-19 pandemic has disrupted business in most companies, leading to many people losing their jobs. As such, the number of freelancers, both online and offline, has increased rapidly.
The idea of earning money while working according to your own schedule is a dream for some and is already a reality for many. If you recently joined the freelancer ranks, whether due to the pandemic or other reasons, then you probably already have an idea of how freelancing differs from a traditional nine-to-five job.
For one, it requires a lot of discipline since there's no one to tell you when and how to work. It's up to you to make your own rules and list of tasks and make sure you follow them to the letter. In this list of tasks, one that you must give time and attention to is accounting.
Whether you're a freelance writer or a self-employed engineer, your total monthly income relies heavily on your finance management strategies. Of course, you'll need to learn these things as you develop your business since no one is born an accounting wizard.
In this article, you'll find some ideas and key accounting tips to keep in mind as a freelancer.
1. Keep track of your transactions
One of the most important things that'll determine your success is how well you manage your financial transactions. Yes, it's easier said than done, given the complications involved. However, if you want a successful business, then this should be among your top priorities.
Everyone tracks the cash inflow and outflow, but not necessarily to the required standards. You probably have a record of your transactions kept somewhere in your locker but still can't see any positive impact. So, where should you make improvements?
- Record everything: Sometimes, you buy items whose cost seems negligible in the grand scheme of things. For a personal account, this might not have significant implications. However, since you're running a business, every expense must be accounted for.
Remember, if you buy such items several times a month, the total cost will soon amount to a significant value. Therefore, make sure you record any money, no matter how small, which goes out of the business and keep the receipts if possible.
- Record regularly: As the business grows, you might be too busy to do your daily or weekly calculation. In such a case, employing an accountant would be the best move.
However, if you can't afford the services of a professional, make sure you record your transactions as soon as they happen. Alternatively, you can set aside a few hours every week to do your calculations. The rule of thumb is that you should never leave a lot of unrecorded transactions pending for too long.
2. Use accounting software
As stated earlier, employing a professional accountant may come in handy, especially when the business is booming. But if you decide to do the accounting yourself, then make sure you do it right.
Keeping receipts and recording the transactions in a book is a good idea, but not the most efficient method in the 21st century. Today's technology has plenty of tools that'll make your work easier.
When you search online, it's hard to miss the great software for accounting and other finance-related purposes. Like any product, you'll come across a lot of brands claiming it can do the job for you. That's why you have to weigh the benefits and drawbacks of each program and choose the one that best fits your business needs. It's also recommended that you select one that's compatible with any other software products you're using to run your business.
3. Keep business and personal funds separate
Mixing your business and personal records will only create trouble and complicate things. If you have one bank account for everything, then starting out as a freelancers is the best time to change. Create a separate bank account exclusively for all your business transactions. In doing so, you'll make it easier for your accountant to record and follow up on any unrecorded transactions.
Another advantage of having separate accounts is that it makes it easier to manage your expenses. Imagine carrying your business credit card and paying for your personal purchases. At some point, you'll be tempted to overspend, significantly impacting your business.
Keeping these records separate may seem tiresome to begin with, but it's a necessary rule for any entrepreneur and will pay dividends when you come to complete your business tax returns. In fact, it'll also affect how you pay your taxes.
4. Set your monthly budget
Another basic rule that many people ignore is setting a monthly budget. Keeping records and using accounting software will only bear fruits if you plan your expenses. Otherwise, you might end up with a greater cash outflow than inflow, which is a sign of a poorly run business.
At the beginning of every month, write down all the expected expenses and include a small amount for miscellaneous purposes.
So, how will you know how much money to set aside? The best way is to make it as practical as possible. If you don't have a clear idea of how much you might spend in a month, monitor all operations for that period. Record all the expenses from the first to the last day of the month and categorise them into two:
- The first group will be all recurring expenses, such as rent, utility bills, and insurance payments (this should appear in your monthly budget).
- The other category will comprise of the non-recurring costs, which are usually paid out once.
5. Be honest with yourself
Even as a freelancer, transparency is key. Many people have failed in business because they have not been honest with themselves, especially when it comes to how much they spend.
Make sure you record all expenses, no matter how insignificant they may seem. Similarly, keep a clear record of your monthly income, and then balance the two (income versus expenses). Are you spending more than you make? Don't pick where and when to be transparent because that could be the beginning of your failure.
Accounting is a very demanding, but necessary part of your freelance business. To manage your cash inflow and outflow, you'll first need to keep track of how you spend your money and how much you're making.
If you want to grow your business successfully, ensure that you're transparent when recording cash inflows and outflows. Setting a budget, using accounting software, and separating your business records will also strengthen your accounting strategies.
Copyright 2020. Featured post made possible by Wave.