Freelancers are still running the show. Popular freelancing platform Fiverr showed it was not a bad career choice, with over 31% of individuals making $75,000 a year. With more joining, 2024 is set to be another record year for those planning on stepping away from their corporate roles and into freelancing.
However, with great prospects comes great responsibility, and the biggest is handling the bookkeeping.
So, let us look at the world of accounting and bookkeeping for freelancers that is created so as not to make your head spin.
What is Bookkeeping?
In the most basic terms, bookkeeping is recording your financial transactions and the methods you incorporate to keep track of your business finances. For most freelancers, bookkeeping involves tracking income and expenses, categorizing them, and reconciling everything at the end of each month. The goal? Keep everything up to date to create on-point reports that allow you to measure your performance.
Bookkeeping vs. Accounting
Bookkeeping sets the stage for accounting with the recording of all transactions. Conversely, you do accounting with those records, such as adjusting revenue and analyzing financial statements. Then, there is also supplying financial advice, auditing, and filing tax returns. Anyone can manage some bookkeeping, but accounting often requires more financial know-how, so many freelancers hire accountants for the complex stuff.
Why is Bookkeeping Important for Freelancers?
Let us talk about the more critical factors of why bookkeeping is crucial.
Planning
Bookkeeping shows what you have earned and what was spent, including what you owe and what you are owed. You can plan, budget, and manage money more effectively when you come to grips with your cash flow.
Making Business Decisions that Matter
When you have real-time financial data, you can react quickly, allowing you to seize new opportunities and prospects and ensure you run your business with conviction and confidence.
Profitability
Bookkeeping helps you earmark pointless expenses and cut unnecessary spending. It can also allow you to gauge which lines of work make you more money and those that do not, giving you the means to adjust rates and pick projects that make financial sense.
Securing Loans
Banks need much convincing paired with reputable paperwork and document trail to give you a loan. They must see your credit score, business plan and cash flow history. If you provide them with hard-to-follow bookkeeping, it makes you look risky. When everything is clear and concise, the impression is you are a safer bet, giving you access to a loan when you need it.
IRS Issues
Slopping tax filing means you can get yourself into trouble with the IRS. Organized bookkeeping will make the process less stressful if you get audited, so compliance is key!
Accountant Cooperation
While initially you may not want or need an accountant, an accountant’s help is beneficial when complex issues arise. If your bookkeeping is in order, the job becomes manageable, saving you time and money.
How To Set Up a Bookkeeping System
Practicality is key. Here is how you can set up a bookkeeping system that aligns with your needs as a freelancer.
Open A Bank Account
Open a separate bank account for your business. This stops confusion and keeps your business and personal finances separate. Consider a business checking account, the recommended choice by bankers.
Figuring Out Payment Terms and Methods
Selecting how you collect payment is necessary depending on the type of freelance work you do. Record your transactions if it is to invoice for ongoing services or charge by the task.
Choose Between Accrual and Cash-Basis
Ask yourself how you plan to keep a record of your transactions. The cash basis records the relevant transactions when money changes hands, while the accrual basis records this process when agreements are made. This is dependent on your freelancing style.
Selecting The Right Software
The right software can do wonders for your business and sanity. It can streamline a range of processes and can help with invoicing, online payments, expense tracking, reconciliation, and reporting. Better yet, it stores your data in the cloud, so there is no worry about losing all-important records.
Top bookkeeping software:
- Xero
- QuickBooks
- Zoho Books
- FreshBooks
Best Practices for Easy Bookkeeping
Now that the basics are covered regarding your system, here are the best practices to keep your bookkeeping running smoothly:
Dedicating Time to Bookkeeping Duties
Do not let bookkeeping fall by the wayside. Rely on a calendar, reminders, or task management app to schedule a weekly time to do this. Hiring a freelance bookkeeper to aid you may be worth it if your workload grows.
Best task management apps for freelancers:
- Trello
- Todoist
- Monday
- Active Collab
Record Keeping
Detailed records are your best friend, ensuring you get paid on time. Keeping a list of clients, costs, hours worked, expenses, invoices sent and received, and payments received. For these reasons, you should consider software to automate this for you.
Getting Reading for Tax Season
Tax can be a shock, primarily if you are used to a salary. Save money for taxes every month, aiming for around 30% of your income. Familiarize yourself with tax decorations available to you as a freelancer, such as business-related expenses and contributions towards retirement.
Innovative Bookkeeping Solutions for Freelancers
In this tech-savvy world, bookkeeping does not have to cause a headache. Equipped with the knowledge of basic bookkeeping and the right software and process, you can easily streamline your financial record keeping. Turn your freelancing journey into a breeze. Remember, bookkeeping is your secret weapon to financial and business success.
