If you are like many freelancers, you probably don’t think that much about managing business finances and you may regard bookkeeping for freelancers as a necessary, but sometimes painful part of doing business. Beyond creating invoices and perhaps tracking expenses, freelancers may not understand the real value of using a bookkeeping application. It’s much more than bookkeeping.
What if I told you that doing your own bookkeeping could save you time, reduce the taxes you pay and increase profit? You might change your mind, then, because there’s something in it for you – above and beyond bookkeeping.
The Real Value of Bookkeeping for Freelancers
The real value of doing your own accounting for your freelance business is: organization, accuracy, efficiency, compliance and financial insight. Consider a self-employed person who uses the “shoebox method” of accounting. At tax time, they take their shoebox of receipts, paid and unpaid invoices to their accountant. Before this, at any point during the year, they don’t really know how much they’ve earned or spent. They probably haven’t analyzed how they could increase revenue and reduce expenses or better manage cash flow. It’s not until this yearly visit to the accountant that they find out. This method of financial management is backward looking and reactionary rather than visionary. By the time you know what you’ve earned, spent and owe tax authorities, it’s too late to do anything about. You’re “Shutting the stable doors after the horse has bolted”, as they say.
If you use small business bookkeeping software that also provides financial visibility (such as a financial dashboard) the benefits are immediate.
With bookkeeping software, everything is in one convenience place. Invoicing, expense tracking, sales tax tracking, bank accounts and transactions, customers, vendors and more. Not only is everything in one place, it’s all connected. With a small business bookkeeping application, you really ARE NOT DOING BOOKKEEPING. The system is doing it for you as you go about the business of sending invoices, recording bills and recording payments.
If you are using the shoebox method of accounting, or keeping track of income and expenses in spreadsheets, there is a lot of room for error. If you enter transactions (invoices, bills, payments, taxes charged) in an accounting system, the “math” is done for you and is accurate.
The shoebox method is haphazard and recording invoices, invoice payments and expenses in spreadsheets is inefficient. Both methods provide little feedback about the financial state of your business. If you are recording those things anyway, why not use bookkeeping and finance software? Doing so increases efficiency dramatically, reduces duplication, and minimizes or eliminates errors.
If the tax authorities audit your business, or, want answers about figures you’ve declared, if you use the shoebox method (or spreadsheet method for that matter), you may be scrambling to provide the information. As a business owner, you have a responsibility to record transactions and keep this data on hand. By using bookkeeping software, you remain compliant. You record income, expenses, payments and taxes charged to a neat and organized system. If tax authorities need to know something, you can print a report, or at least find the required information. Try that with your shoebox.
- Financial insight
The most important part of bookkeeping software, particularly if it has a financial dashboard and full suite of financial reports, is the insight it can provide you. At any point during the fiscal year (and past years), you can know what you’ve earned, spent, and how much your business profited (monthly, quarterly, year to date and for the year). If the bookkeeping software has budgeting capabilities, you can set income, expense and profit targets, giving yourself goals which you can then compare to “actuals”.
How Does All of This Translate into Profit?
By using an organized system to record income, expenses, and taxes charged and paid, your books will be more accurate and you’ll save time. At tax time, you or your accountant/bookkeeper will know how much exactly, you can deduct and exactly how much sales tax you must remit to tax authorities. More importantly, you’ll know how your business is doing financially any time, not just at tax time. You’ll be able to act in the present moment on the financial insight provided by the bookkeeping and finance system. With all of this and real time financial metrics and budgeting, you’ll be able to really understand business finances and make changes and plans to reduce expenses and grow profit.