Working as a freelancer can feel like a juggling act. You’ve got to be able to manage lots of different tasks – including basic bookkeeping. Here, leading accounting software company Xero share some tips to help you stay on top of your daily accounts.
Recognise the importance of bookkeeping in your business
A common concern for freelancers is getting paid. As a freelancer, you may have a few different clients. It can be hard to keep track of who owes money, when, and how much.
That's why it's important for freelancers to understand the basics of bookkeeping and how to use bookkeeping tools. You’ll be able to keep tabs on outstanding invoices, so you can collect payment. You won't miss out when billing your clients. And you’ll be able to quickly identify your cashflow.
You probably already have an accountant. If you don't, get one now. But an accountant might only review your finances annually. Bookkeeping gives you a more up-to-date view, especially when you make updates daily. If you find you run out of time to maintain your accounts regularly, investing in a bookkeeper could free you up to spend more time doing what you love. Here's how you can make bookkeeping work for you.
Create an organised system
Organisation is crucial in good bookkeeping. Without it you'll struggle to manage your finances, so start as you mean to go on:
- Put it in place from the start, as soon as you begin freelancing. Don't put it off, or you might find it hard to remember your past transactions.
- Talk to a bookkeeper and ask their advice. Ask what software they use. It makes life easier if you’re on the same online accounting software. That way you can share data easily and securely, wherever your work takes you.
- Use a celebrated accounting system. Good accounting software guides you through the basic bookkeeping steps. All you need to do is fill in the details and, at the start, have it checked over by a bookkeeper or accountant.
- Set aside time to do the books every week – fall behind and you may struggle to catch up. Hiring the right bookkeeper can make a big difference to your business.
Keep records of key parts of your business
The parts of your business you should record include:
- hours spent working, or the jobs completed, for each client
- cost per hour or per job for each client
- business expenses (and keep all receipts)
- all payments made by you, including bank transfers
- all payments received from clients.
Record all of this in your accounting software. Modern accounting software can use this information to:
- generate accurate invoices
- produce cashflow reports
- keep track of money owed to you (accounts receivable)
- keep track of money you owe to others (accounts payable)
- identify your best clients (and your worst).
Accurate bookkeeping has other benefits too. For example, it means you’re prepared if you are ever audited by HMRC. It can also act as proof of income when you're applying for a mortgage or other credit.
Offset your expenses against tax
If you’re a freelancer, you can offset many of your expenses against tax. You can offset things like:
- travel expenses, although not to and from a regular workplace
- office rent, including a room in your own home
- power and utility bills
- capital expenditure on things like a computer, printer and phone
- internet and phone bills
- vehicle maintenance and mileage if you use your car for business
- client entertainment expenses, though restrictions apply.
So make sure you record all of these details when keeping your accounts.
In most cases you can only offset a proportion of your expenses. For example, you can offset the rental cost of a room in your house, but not the whole house. And you can claim fuel costs, but only for the distance driven on business.
Talk to your bookkeeper to find out what you can offset, and beware of pitfalls. Let's say you bought your house with a loan: you might be able to offset part of the interest payments against tax. But if you do, you may have to pay that amount back when you sell your home.
Get paid faster
One of the big benefits of having up-to-date accounts is the ability to get paid faster. Collecting payment on time is a real issue for many freelancers, but bookkeeping can help.
Invoice promptly and regularly
It only takes a few minutes to create and send invoices in an email. If you've already got all the necessary information in your accounting software, there's no need to do it all again. Just click and send. Learn more in this guide: How to streamline your invoicing process.
Identify late payers at a glance
With up-to-date accounts, you can easily spot late payers. An ageing summary report will show you who owes what, and how overdue each invoice is. You'll quickly see which clients are problematic.
Set reminders – for clients and yourself
You can set reminders that let you know when an invoice is approaching its due date. With modern accounting software, reminders can also be sent to the client – automatically.
Chase – politely but firmly
If you've completed your work to the agreed standard, your client is legally obliged to pay. So don't be embarrassed about chasing payment – it's your money.
Put money aside for your tax bill
Unlike a regular employee, your tax isn't deducted from your pay as you earn. That means you need to put money aside for your tax bill and you need to be disciplined. It's important to get into the habit so you don’t get caught out when tax time rolls around.
Some freelancers set up separate bank accounts just for their tax payments. Using reports from their accounting software, they can get a good estimate of what their tax bill will be. They then put aside the appropriate percentage of their income each month. This way they know they'll have enough money to pay the bill.
You have to take this seriously. HMRC is unlikely to be lenient if you fail to pay your tax bill on time. So put money aside and record it when doing your bookkeeping.
Make bookkeeping work for you
If you’re a freelancer, bookkeeping is a vital part of running your business. It helps you plan tax payments, keep track of expenses, and manage late payers. But above all it gives you a clear view of the state of your finances.
This is extremely important - it's easy to lose sight of the big picture when you're constantly working for multiple clients. With good bookkeeping you get a clear picture of cashflow, income, expenses and business growth. Without it, you'll be struggling along blind.