9 Mistakes Freelancers Make that Small Business Accounting Software Helps Solve

small business failure

Below is a list of common mistakes made by newbie freelancers (and many seasoned freelancers) that small business accounting software can help remedy. “Come on! Really?”, you might be thinking. “I’m a freelancer. I don’t need accounting software and how can accounting software ‘solve’ anything?”. Anything you can do to take control of business finances will “help solve” the common mistakes we’re about to delve into.

Cut to the chase, or read on for a little passionate persuasion.

If you are among the many self-employed people who “wing it” in business, you may want to consider Small Business Administration statistics:  20% of new businesses fail in their first year and 50% fail by year 5.

Now you know the scary truth. What to do about it? First, you need to know why small businesses fail. According to StatsBrain “Startup Business Failure by Industry“, the number one reason for business failure is incompetence, which includes: lack of planning, no knowledge of financing and no experience in record keeping. While there are many other reasons, some beyond your control, such as the economy, too much competition, competition –  to name a few – the one thing you can control, without too much trouble, is that whole financial “incompetency” thing. You don’t need to be a financial whiz, either. You need awareness and some tools.

Let’s, finally, get to that list.

9 Mistakes Freelancers Make

1) Thinking Financial Management is Only for “Big” Businesses

Somehow, freelancers don’t “feel” like business owners. I used to feel this way. “I’m not a real business owner. I’m some guy sitting at a desk at home! I don’t go to an office. I don’t have employees. I wear pajamas while I work. I didn’t comb my hair this morning! I’m free!” OK…we agree that many small business owners don’t work in their PJs and most do groom before heading off to work, but, that doesn’t mean you aren’t a “real business owner”. You, my freelancing friend, are just that because: you and you alone are responsible for chasing after your earnings, you work for customers not “bosses”, you have business expenses, you pay taxes on business earnings, and, most importantly, your business lives or dies by your wits. Say it with me: “I. Run. A. Business.” Pajamas and messy hair notwithstanding.

How does small business accounting help solve with this problem?

Good small business accounting software hides the complexities from freelance users and makes financial management easy, even fun! After using an accounting application for awhile, you’ll wonder why you thought it was a tool for “big business” or accountants. You’ll experience its benefits immediately and will be able to take control of your finances. Accounting software (particularly all-in-one applications) are for any business, including freelance businesses.

2) Failing to Separate Business from Personal Bank Accounts

If you operate your business as a Limited Liability Company or Corporation, you have a duty to separate the business identity from that of the people that are part of the business (owner, shareholders), therefore, you must have separate business bank accounts. As a sole proprietor, this “separate” distinction does not exist – the business owner and the business are one in the same. While you don’t have to have separate bank accounts for business, inter-mingling businesses transactions with personal transactions can make it difficult for you, and, difficult for the tax authorities (IRS). According to The Balance “Why Your Business Needs a Separate Checking Account“, using one account for business and personal could trigger an audit.

How does small business accounting help solve with this problem?

While small business accounting software can’t physically “open” accounts for you, once you have separate bank accounts for your business, it can make tracking transactions in those accounts very easy. With Flare small business accounting and finance software, you can auto-download your bank transactions file and quickly categorize transactions into relevant income and expense categories. In the background, Flare does all the “bookkeeping stuff”, generating income, tax, and expense reports that you can provide your accountant at tax time. The tax folks will be happy, which should make you happy.

3) Providing Estimates Verbally

As the saying goes “Get it in writing”. You should also “Give it in writing”. I’ve known many freelancers who are willing to provide an estimate verbally (over the phone for example), only to be stung later by a client who “misremembered” the prices discussed. You can save a lot of friction by creating an estimate document.

How does small business accounting software help solve this problem?

You can create and send estimate PDFs and have a permanent record of all estimates you give. In the estimate, you can quote for each line item, stipulate an estimate expiry date, and add disclaimers.

4) Sending Estimates or Invoices Created with a Word Processor

While word processing templates are better than nothing, the biggest issue with them is that they are “disconnected” from an accounting or income tracking system. They are also inefficient. You wind up with a folder of expense and invoice PDFs, with no easy way to search them, total them, or make sense of trends. It’s better than paper, but not much better.

How does small business accounting software help solve this problem?

If the accounting software you use has built-in estimates and invoicing, you’ll save a LOT of time. Once an estimate is approved you can convert it to an invoice. More importantly, you have a permanent record and invoices are connected to your accounting system. Every invoice you create generates an accounts receivable that is zeroed out when the invoice is paid. All the accounting is done in the background. The accounting software does most of the work! If you use Flare, you can easily view the number of outstanding estimates and invoices. Invoices, or course, are tied to customers, so you can easily track invoices and invoice payments by customer.

5) Failing to Track Sales Taxes

If you fail to track sales taxes, you may also fail to put away the tax you must remit to authorities. At year end, you may be surprised by a shocking tax bill.

How does small business accounting software help solve this problem?

Accounting software allows you to set up taxes charged to customers and paid to vendors. With Flare, you can set up individual taxes and group taxes (tax groups contain 2 or more individual taxes charged on sales). The system tracks all taxes separately. You can quickly run a tax report to know how much you should be putting away to remit to tax authorities. There’ll be no surprises at year end.

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6) Failing to Track Expenses

Expense tracking is vital to freelancers. First, it helps at tax time. Secondly, knowing your expenses can help you solve cash flow issues, and lastly, your profit depends on astute expense management. You need to know, for many reasons, every dime your business spends to operate.

How does small business accounting software help solve this problem?

Every bill you receive can easily be recorded and categorized in the accounting system. You can track outstanding bills and paid bills quickly. The accounting system will provide many ways to view expenses. In Flare, you can generate reports, view expenses by vendor and view aging payables.

Some of your expenses will be tax deductible. Because all expenses are recorded to chart of accounts expense categories, you or your accountant can more easily see deductible expenses so you can squeeze out every allowable deduction at tax time.

Flare Cloud Accounting also makes it easy to plan to reduce expenses, via budgeting, and will help you avoid cash flow issues, because you’ll be able to predict expense-heavy months over the year, and spot wasteful expenditures.

7) Failing to Budget

Some freelancers don’t consider business financial planning. They may think it complicated, boring, or both. The simplest type of plan is a budget. Failing to budget can lead to cash flow issues or no or slow growth. Successful business owners understand the value of budgeting. A budget forces the business owner to work toward goals and get to know business finances at a very basic, yet necessary level. It makes the person or people running the company accountable.

How does small business accounting software help solve this problem?

If the accounting software you use has an interactive budget (as Flare does), you’ll be able to set income, expense and profit goals. By doing so, you’ll be more likely to take actions to achieve those goals. In Flare, you can set up a budget in minutes. Once set up, you can compare budgeted income and expenses to actual income and expenses. When you see that you are straying from your budget goals, you can look at “actuals” to gain an understanding of why, and then make business decisions to help you stay on track going forward.

8) Focusing Too Much on Acquiring New Clients

In the article “Finding New Customers is Great. Keeping Old Customers is Better“, we discuss why the customers you have are gold. It costs much more for businesses to acquire new customers than it does to get more business from current (old) customers. This is why customer retention departments have become more prevalent in business.

How does small business accounting software help solve this problem?

By seeing each customer’s purchasing behaviour (when, what, how much) over time, you can find out which customers bring the most value to your business. With Flare’s customer-value tracking, you’ll know how much you earned from each customer in the fiscal year, and can compare their current year spending with the previous year. By knowing who your most valued customers are, you can devise ways to keep them coming back, and, know what type of customers are best for your business’s bottom line.

9) Not Using an Accounting System

If you are not using an accounting system, you may be making your business life a lot harder. You may use several applications, spreadsheets, paper, or post-its to manage your business’s finances. You’ll also miss opportunities to prevent financial problems and earn more profit.

How does small business accounting software help solve this problem?

Freelancers may assume that their one-person operation doesn’t need a fully-loaded accounting system, or, that accounting software is for accountants and not them. Good online accounting software does much more than bookkeeping, though. As you can see from the list of problems it solves, accounting software, such as Flare, can be like the Swiss-Army knife of small business financial applications. It saves time, increases efficiency, performs many common tasks relevant to freelancers (e.g. invoicing, expense tracking, sales tax tracking) and has many other features that can improve a freelance business’s financial performance. It’s not just for accountants! If you have some basic bookkeeping skills, great! But, you don’t have to have experience to use Flare.

Your Turn

A list of 9 seems incomplete! Suggest mistake #10 in comments and we may add it to the list.

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