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Managing finances is one area of freelancing most of us don’t want to think about.
We just want to focus on the more interesting parts of running our business, whether that means focusing on writing marketing copy or designing product labels.
But no matter how hard we kick and scream, the IRS just isn’t going to let us get away with not paying our tax bill when the time comes.
When you had a full-time job, it was a lot easier to manage your finances because your employer handled everything.
But now that you’re the boss, it’s time to put on your big girl pants and learn how to effectively manage your finances as a freelancer or small business owner.
The first thing you want to to do is get an accountant or accounting software. Someone or something that knows what they’re doing when it comes to taxes and the laws regarding it.
Because you don’t want to end up with a huge headache come tax time because you tried to DIY it. So, get the help you need to manage your finances accurately and effectively.
Accountants Vs. Accounting Software
Accountants
An accountant can help you manage your finances as a freelancer by giving you the guidance you need to make smart money moves. That means making sure you’re aware of certain tax breaks and helping you get the most out of your money. An accountant can make suggestions for what accounts you should open and can even do your business taxes for you.
Pros:
- Expert help from a trusted advisor
- Minimal chance of errors
- You’ll get a human touch (which is a plus for some people)
- Extra help if you need it
Cons:
- Could be too costly for most startups
- Speed – it might be quicker to go through a software program to file taxes (accountants can take anywhere from several days to a few weeks to finish filing your paperwork because they have other clients)
Accounting Software
Tons of small businesses use accounting software to help them manage their finances because it’s cheaper than hiring an accountant. Accounting software like FreshBooks can help make managing finances just a little easier.
Let’s look at the pros and cons of accounting.
Pros:
- Affordable for most solopreneurs and freelancers
- Simplicity – it’s usually pretty easy to use any financial software program
- Sometimes comes with extra help from a CPA (if needed)
Cons:
- Could miss out on some tax breaks
- Might not be up-to-date according to current laws
How to Find a Good Accountant
If you’ve got the budget and you’d rather not risk anything, start by asking for recommendations from family and friends. Chances are there’s someone who knows someone that’s a good accountant.
If that’s not an option for you, start by doing a LinkedIn search for accountants in your area. The top accountants (much like other professionals) will usually have a LinkedIn page because the site is for networking and making professional connections.
Here’s what you should look for in a good accountant:
- Trustworthiness (’cause what’s more important in an accountant, right?)
- Great organization
- Excellent communication skills
- Attention to detail
- Great time management skills
- Client-focused
- Flexibility
- Creative
- Commitment to excellence
- Extremely knowledgeable
The accountant you choose should have all of the above qualities, or you might have issues with them or their services.
How to Find Good Accounting Software
Choosing an Accounting Software
Choosing a good accounting software means knowing what you need and going after it.
Do you need to automate some of your business finance tasks?
Do you need something cloud-based to save space on your computer?
Think about what’s most important to you based on the type of business you own.
Some of the other features you might want to look for include:
- Ability to create and manage your taxes
- Ability to manage inventory
- Expense tracking and funds allocation
- Invoicing
- Ability to manage client and vendor info
- Purchase order creation
- Payroll management
- Bonus and compensation management
- Easy-to-use interface
You have a few options when it comes to good accounting software programs, including:
What You Need to Know
Keep Your Business and Personal Accounts Separate
So many freelancers make the mistake of mixing their personal accounts with their busines accounts, which could spell trouble if you’re ever audited by the IRS.
That’s why it’s important to get your business bank account as soon as you get your EIN number and file to incorporate your business.
Both are free to obtain through the IRS website and Incfile respectively. However, you may have to pay a state fee (depending on your state). Here in New York, the fee is about $200.
So figure out what the requirements are in your state and start gathering everything you need to form your business.
Once it’s legally formed, open a business bank account. Chase and Bank of America are too good options to start with but do your research before making a decision.
Track Your Expenses
Anything you spend money on for your business, keep a record of it. You can keep a log as well as the actual receipts so that there’s no confusion if you’re ever audited.
Track your expenses on paper or enter it into your financial software (if you chose that route).
You can make one yourself using a site like Canva or Snappa or you can buy one for cheap on Etsy. They have tons of them.
Or you can also use an app to track your expenses.
Apps like these can help you keep track of your business expenses.
Create a Budget
Just like with your personal finances, a budget can help you keep your income and expenses in order so that you can continue to run your business efficiently (and so you don’t get in trouble with the tax man).
So create a business budget. Think about the things you spend money on the most and write them down. Once you have a list, determine whether each expense is necessary. If not, take it out of the budget and allocate that extra money elsewhere in your budget (to a place that needs it most).
Download or create a budget sheet and do your best to stay within your budget so that you don’t overextend yourself.
Pay Yourself
Whenever a client pays you, pay yourself half of what you earned and put the other half back towards business expenses.
Some typical business expenses might be:
- Accounting/bookkeeping, and financial consulting fees
- Advertising expenses
- Automobile expenses (only the percent that is used for business)
- Bank service charges and fees
- Books and periodicals
- Coaching fees, if related to your business
- Computer, printer, and software (if used over 50% for the business)
- Consultant fees
- Dues for professional and trade associations
- Education expenses for maintaining or improving any required skills
- Email, Internet access, faxing costs, and web hosting services
- Insurance expense
- Legal and attorney fees
- License fees and taxes
- Merchant account or credit card processing fees
- Office furniture and equipment
- Office supplies
- Online services used for the business
- Postage and shipping
- Printing supplies and copying costs
- Self-employment taxes
- State and local business taxes
- Preparation of business tax return
- Telephone expense (only for a separate business line)
- Travel expenses
So when you’re doing your business taxes, look over this list to see if any of these apply to your business. Have you spent money on any of the above for your business? If so, you might be able to write it off on your taxes. Just make sure to keep a record of everything.
Keep a Business Savings Account or Emergency Account
Business can be unpredictable at times. But if we can weather the storms, we’re usually well rewarded.
One way to weather the storm of a slow month in business is to have an emergency account or a business savings account.
Whatever money you’re bringing it, make sure you’re saving a portion of it for emergencies because you just really never know.
So start researching the best business bank accounts and apply once you have your EIN and Articles of Incorporation.
When I did my research, I thought about whether I could do an online bank because I’m already banking with Chime because…fees…c’mon…ain’t nobody got time for that (and Chime gives you $50 just for referring friends and family – as long as they open an account with a qualifying direct deposit within a set amount of time).
But for my business bank account, I decided I wanted something that’s close. Something with a branch.
Just in case I have an issue that can’t be resolved by customer service agents in some obscure foreign country.
Business Credit Cards
Another way to manage your finances as a freelancer (if you’ve got a few of them – like a cell phone bill, an internet bill, or a subscription to a business product/service like Microsoft Office) is to get a business credit card.
Keep all of your receipts in a safe place so that if your business gets flagged and audited by the IRS, you’ll have a record of all of your expenses and transactions.
But make sure you’re managing your credit card balances and that you don’t overextend yourself. If you’re trying to build business credit, this is especially important because business credit builds faster than personal credit. So you want to avoid making any preventable mistakes.
Managing Your Finances Like a Boss
Now that you’re a bit more financially literate when it comes to running your business, you can make better financial decisions for better business growth. Make some boss moves. You got this.
What else would you like to know about finances as a small business owner?
Let me know in the comments and if you found this helpful, please share!
