As a freelancer, you know how hard it is to keep track of everything under the sun. From receipts and invoices to meeting invites with partners and prospects—there’s just too much to track. Add walking your dog, meal prepping, and getting a full 8 hours of sleep? It’s too easy to neglect bookkeeping.
A consistent bookkeeping log is key to solve these problems.
Why Bookkeeping Matters as a Freelancer
As a small business owner, there are always two key activities that you need to properly plan for. That’s getting paid and getting prepped for tax season. Both of these activities require long-term planning, rather than being a quick overnight success. And that all comes down to understanding the basics of bookkeeping and keeping bookkeeping activities consistent and organized. After all, that also gives you more time to focus on doing what you do best—selling and working with your clients!
Consistent bookkeeping also helps you be that much more prepared if and when you do receive an audit from the IRS or CRA.
What to Track for Better Bookkeeping
With getting paid and tax season in mind, always keep in mind the different data and write-offs to keep track of and why. Trust us—you don’t want to be scrambling at year-end.
Track your time
If you charge an hourly rate for services, you know that time is of the essence. That’s because your time equates to dollar payoff and is directly tied to your invoicing. As an ongoing practice, take note of how many hours you work. Time tracking tools like Toggl Track, Harvest, and Everhour are great for tracking your hours. All of these tools offer web browser extensions, making time tracking incredibly easy to access. Time tracking is ideal in situations where clients may want to see a time tracking report appended to your invoice.
Track your jobs and client information
Depending on the type of freelance you are, be sure to keep detailed records of every single job you have ever completed for clients, including the cost per hour you charge. You could create a laundry list of every client you have ever worked with, including the rate (hourly or fixed) each year that you work with them. If you raise your prices due to inflation (or other reasons), you’ll want to increase them across all of your clients—not just a few.
Track your expenses
Tracking all your business expenses and payments you made is crucial to getting dollars back into your pocket. As a freelancer, every dollar counts!
Some typical expenses include:
- Client payments
- Travel expenses
- Power and utility bills
- Phone and internet bills
- Bills for technology purchases like a computer, printer, or phone
- Career-related classes, books, and seminars
- Office supplies
- Website design and hosting
- Office rent (can be a room in your home, but not the whole house)
Small business owners are eligible for a range of deductions come tax time. When tax season arrives, you’ll want all of your expenses neatly categorized by expense account and all documentation saved in case of an audit. And yes, these payments include bank transfers too!
Leave Nothing Untracked
Organizing your books and accounts is one of the most fundamentally important activities as a freelancer. If your accounts aren’t organized, chances are, your finances aren’t either. To start, begin recording each transaction that occurs as they relate to your business. This includes meals, travel, accommodation, supplies, and each payment that you receive.
Tip: Don’t put this off. We recommend doing it in real-time or during a weekly reconciliation on a Sunday, for example.
In general, these are the essential aspects of your business that you should most definitely be tracking:
- The billable hours worked or completed for every client
- Rate per hour/job for every client
- All payments made, including bank transfers
- Payments received from all clients
- All your business expenses, including the receipts
If you use accounting software, you should be able to generate a variety of reports based on your financial records. Because the software updates in real-time through your business bank feed, these reports are always up-to-date:
- Accurate invoices
- Reports, including Profit & Loss, Balance Sheet, General Ledger
- Information on how much money is owed to you (e.g. account receivables)
- Data on how much you owe (e.g. account payables)
- Information on your best and worst clients
If you need help, in the beginning, try seeking help from a professional accountant or bookkeeper. You could bring questions to ask, such as how you can best deduct more of your expenses or the accounting software that they recommend (but more on that later).
Set Aside Cash for Taxes
As a freelancer, the responsibility of getting ready for tax season falls on you and nobody else. If you’re a new freelancer that recently left a 9-5, you may be used to having an employer automatically deduct a portion of your earnings from each paycheque to cover your income taxes.
But not anymore.
As a freelancer, your tax won’t be deducted from your pay. Since you’re making more money, you should be expecting a higher annual tax bill. As a rule of thumb, you should always anticipate owing taxes when tax season arrives. Instead of frantically pulling together the cash, set aside money throughout the year instead of in a separate bank account.
30 percent of your income is the general rule. With the help of accounting software like TrulySmall Accounting, you can create reports (based on your net income, for example) that give you a rough estimate of how much you will owe in taxes. Setting aside cash for taxes (on top of a rainy day) will require discipline, but it’ll be worth it to avoid penalties and fines.
Establish a System that Works For You
Knowing what’s going on with your money can help you succeed as a freelancer. With little to no guidance at all, it’s up to you to stay on top of your finances, including bookkeeping.
Whether you use an accountant for tax season or not, it’s important to have a handle on your finances all year long. This helps you anticipate future problems and grow your business. Set your freelance career up for success by allocating time daily to organize your bookkeeping and ensure you enter every invoice or expense receipt.
Tip: as part of your “system”, add annual pulse checks with your accountant so that you’re positioned well for tax season. For example, you can conduct a 30-minute phone call with your accountant with a list of questions to ask them prior to tax season.
Adopt Accounting Software to Streamline Bookkeeping
Adopting accounting software may just solve every challenge freelancers face when approaching bookkeeping. Accounting software serves as a digital bookkeeping log where you can centralize tracking and documentation. From receipts and invoices to every client you have ever worked with (with key metrics like Total Invoiced #), accounting software makes your life easier.
On top of avoiding negative situations like losing hard-earned money or limiting your financing options, consistent bookkeeping (with the help of accounting software) actually avoids error, saves you time, and most importantly—gets you paid. Here are some ways that accounting software can help you:
- Quickly create and send custom invoices
- Get reminders on the course of action for invoices
- Automate payment reminders for you and your clients
- Easily identify and follow up with outstanding invoices
- Pull reports to understand total net income, top-paying clients, and much more
Conclusion: Better Bookkeeping Starts With Tracking Everything
As you know by now, keeping a consistent bookkeeping log and paper trail is key for freelancing success. As a freelancer, you should be tracking everything related to your business. Get into the habit of asking for documentation (e.g. receipts) for every transaction, as they relate to your business, and do not forget to save your paper trail somewhere!
Here at TrulySmall, we care about the success of your business. Not just for today, but for the long haul. That’s why we created this article to guide you with small and actionable steps to stay on top of your bookkeeping. Why?
Because the small stuff matters.
Interested in centralizing your bookkeeping log in a cloud-based, intuitive software? Try our 14-day free trial using TrulySmall Accounting today to start your bookkeeping journey. If you’re looking to start smaller, TrulySmall Invoices lets you send your first few invoices for free to test out the waters.