Accounting Basics for a Freelancer

Posted by FreelanceSwitch.com

This post is a guest post from Allan Branch, a web designer/entrepreneur who started as a freelancer. After just 4 years Allan’s company has grown to 10 full-time employees and is responsible for the indispensable LessAccounting as well has several other apps still in beta.

Over the past years, my business has grown from a freelancer fresh out of college to a business with employees, constant expenses and payroll. When you’re in the early stages of freelancing accounting is simple. You always know what you have in the bank, you have few expenses and few accounts receivable. As you become more established your accounting needs grow. Things can be easier later if you setup a simple accounting protocol early before these problems arise and take over your life.

Here are some basic accounting steps for a freelancer:

Step 1 - You need a system to bill people.
There are tons of invoicing tools online, (LessAccounting, BlinkSale, FreshBooks). Most have free accounts for you to try out, and it’s worth utilizing these great resources. Web based systems are best, I lost all my 2002 data due to a HD crash and no, I didn’t have backups. It cost $3500 to recover my accounting data for that year.

Step 2 - You need to know who owes you money.
You need to know who is past due, who is paid up. Some of these invoicing apps allow for due date tracking. Or you can use a calendar app (gcal, ical etc) to do that.

Step 3 - Track your expenses with a fine tooth comb.
Tracking business expenses will save you thousands of dollars at the end of the year. Save every receipt - gas, food, mileage on your car, parking fees, computer expenses, phone lines, internet connections anything related to your business. In a future article I will talk about commonly missed business expenses and what you need to record in addition to the receipt. There are several ways to track expenses. Using a shoebox for handling expenses is asking for trouble. There are many expense tracking services online. Or you can use a google spreadsheet and enter them in by hand.

Step 4 - Don’t use your personal bank accounts to make purchase for the business.
Have at least one business bank account and use it exclusively. If you violate this rule you risk “piercing the corporate veil.” Which means you loose your business and your house and your car and money if you got into legal hot waters.

Step 5 - Find a good accountant, preferably someone you feel comfortable with.
Someone who is affordable and will answer your questions. I found an accountant that not only helped me with my books he referred clients to me! Make sure you find out how much it will cost you at the end of the year for his or her services. Be sure to be up front about your expectations as a client, do you need financial planning? Do you need an accountant or just a tax service?

Step 6 - Don’t allow accounting to take over your life, accounting won’t make you money.
If you find yourself too busy to handle it ask your accountant about bookkeeping services. Do what makes you money, you’re not an accountant don’t try to be one. Having a good accountant might cost you money but he or she should be able to save you money every year.

No one likes accounting, designers would rather design and programmers would rather code. But it’s a necessary in the world of freelance and small business.