For every business owner, self-employed individual, or freelancer, you need to keep your finances organized. The biggest reason why most businesses fail is because they don’t know their numbers.
The biggest reason why businesses don’t know their numbers is not because they’re too lazy to get themselves organized, but they just don’t know how to keep track of their expenses.
Bookkeeping can get very complicated and very confusing. And the bigger your business is, the more important it is for you to keep very organized books. But once you’re at that point, you should have enough to hire one of our own bookkeepers.
But self-employed people can do their own books. You just need the right software, systems, and spreadsheets.
So let’s jump right in with a basic bookkeeping guide for beginners.
There are 3 main bookkeeping applications which are a must for any freelancer or business owner. By far the biggest player in the market is Quickbooks, but Xero and Sage are good options too.
What these apps do is they track your spending based on the accounts you attach to your app. We know and use quickbooks so the way Quickbooks works is they track your expenses and you decide what kind of expense to organize it as. They also explain what every expense type is and will give you tools to help you best understand what type of expenses you have.
You also have the option to do manual bookkeeping. The difference is that there is no one looking at your bank account. You are entirely liable to keep up with your expenses and make sure they are accurate. This method makes you more susceptible to human error, but you don’t have to pay and you get the security of keeping your bank information private.
Manual bookkeeping can be done either with a pen and literal book (there are some very fun-looking old style books at Staples) or through a spreadsheet application like Microsoft Excel.
Single Entry vs. Double Entry
The next choice you need to make is whether to organize your books by single entry or double. Single entry means that each transaction takes one entry in the ledger. Double entry means that it takes two – for example, you sell something and you have one entry where it’s an increase in cash and a decrease on your inventory.
Most freelance workers only need single entry, which is much faster and easier. But if you run a more organized business where accuracy is critical, then double entry is the way to go.
You want to keep every receipt that relates to your business. Overtime, it’s also helpful to get in the habit of writing what the receipt is for on the back. We know this can be a tough habit for someone to start, but it’s critical that you start doing this for every business receipt. If it helps, do this for all receipts no matter what.
Business owners usually keep receipts gathering in a box and every once in a while (we recommend once a month, or at least a quarter)
You also want to keep your invoices well organized. An invoice is basically a request for money for the services you offered. You want to make sure that every client gets an invoice, that they’re accurate, and you know which ones are paid and which ones are not.
If you hire anyone, whether full-time, part-time, or as a subcontractor, you need to make sure your payroll is accurate and up to date. You always want a clear record of how many hours are worked, whether the labor was done to your specifications, and make sure that all hired work is paid for reasonably and on time.
Finally you should get financial reports so that you know the financial direction of your business. How much more you’re making each quarter, what financial trends are throughout the year, where you can afford to cut costs and what is valuable for you.
You should keep a record of all of the following:
- Payroll records
- Bank and credit card statements
- Car miles
- Tax information
Once you have a method where you can compile all the data you need, organize them all, and create reports on a regular basis, then you have a clear picture of your business’ financial state and are ready for tax season.