Bookkeeping refers to the systematic method of organizing and recording financial transactions and relevant financial information. Done on a day-to-day basis, bookkeeping ensures the financial transactions of the business or the self-employed individual are up-to-date, accurate, and comprehensive.
Being an aspect of the accounting system, bookkeeping provides inputs for accounting. The financial data is used by accountants to prepare reports, perform financial analysis and help businesses make informed investment decisions.
If you have a freelance consulting business, following bookkeeping best practices will make you more effective.
Why is bookkeeping important for freelance consultants?
Getting remuneration and getting paid on time are the most common concerns of freelancers. As a freelance consultant, you will typically have different clients. This makes it difficult for you to keep track of how much money you are owed, when, and by whom.
Knowing the basics of bookkeeping and using the right bookkeeping tools will help you track outstanding invoices, record the payments received, and know when to bill your clients. Diligent bookkeeping will enable you to quickly assess your cash flow status at any given time.
Ensuring your financial data is accurate and up to date is a vital part of being a successful freelance business owner. Accurate data will help you make informed, sound business decisions while maintaining a healthy cash flow.
Besides, following bookkeeping best practices helps you:
- Know if you are making a profit or losing money
- Calculate the taxes you need to pay and file accurate tax returns
- Budget accurately for business expansion
- Set clear freelance business targets
- Access all financial information with ease
- Meet government regulations and compliance requirements
Business bookkeeping best practices
Know the bookkeeping basics
There are two types of bookkeeping systems: single- and double-entry bookkeeping. Single-entry systems involve recording each transaction with one entry.
In a double-entry system, two entries are made in respective columns of debit and credit. The sum of debits will equal the sum of corresponding credits.
The kind of financial data you need to record include:
- Payments you receive
- Producing invoices
- Supplier payments
- Payroll checks if you hire others to work for you
Begin your bookkeeping as soon as you commence your freelance business. If you postpone it, you run the risk of missing important past transactions.
Use a bookkeeping system/software
While you can use spreadsheets or the traditional book-based system to record transactions, there are many bookkeeping software products that are now available. Use a recognized, validated accounting system that guides you through the bookkeeping steps. It should be simple and easy to use where you just have to fill in details in the template.
The key aspects of your freelance business need to be recorded in the system, including:
- Hours spent working
- Projects completed per client
- Total number of projects handled to date
- Hourly rate / fixed monthly retainer or project cost for each client
- Business expenses
- Payments you make
- Bank transfers
- Payments you receive from your clients and the dates on which you receive them
Track accounts receivables
Modern accounting software comes with automated accounts receivable systems that can:
- Create cash flow reports
- Generate accurate invoices
- Keep track of accounts receivable (the money your clients owe to you)
- Keep track of accounts payable (the money you owe to others)
- Identify the best and the worst clients
- Send reminders on collecting payments or sending invoices
Separate your bank accounts
Unlike a salaried employee, tax is not deducted from your pay packet. You will need to be disciplined about putting aside money for the tax bill. Some freelance consultants set up a separate bank account for tax payments. Your accounting software can help you estimate the tax bill, and accordingly, you can put aside a percentage of your income each month into the tax-specific bank account. Ensure you record this transaction in your bookkeeping system.
Record all expenses
Record each and every expense you incur if you work out of your home office. Freelancers can claim tax deductions for expenses related to:
- Phone bills
- Vehicle and travel expenses
- Health insurance
- Software and hardware
- Office supplies
- Advertising materials
Smart bookkeeping is all about monitoring your cash flow, sending invoices on time, and keeping track of your payment. You can utilize the bookkeeping tool to include payment gateways in your invoices. This means your customer can click on the link in the invoice to quickly make a payment.