Many people prefer to work for themselves rather than as an employee. But being your own boss not only comes with more freedom to work as you choose, it also comes with added responsibility. Sorting out your own accounts is definitely one of them. As a freelancer, you are a business owner, and one of the key determinants of your commercial success is how you manage your finances and business accounts.
At Wellden Turnbull, we work with businesses of all shapes and sizes, with a comprehensive range of services that are targeted to each client’s business need. Over the years, our team has helped to grow and develop many start-ups and sole traders with valuable advice on tax, accounting and financial planning. We thought it might be useful to share some of our experience, so we’ve put together some accounting tips for freelancers.
1. Think of yourself as a business
Many creatives such as designers, writers or artists shy away from engaging with the commercial side of their business, preferring to immerse themselves in their chosen passion. Then, when the tax deadline beckons, it’s panic stations. If this sounds like you, some mental attitude shifts may need to occur. You are as much a business owner as the shopkeeper down the road, and if you are planning to make a living from your creative output, effective accounting and financial management is part of your job.
2. Keep business and personal finances separate
Your business revenue is not the same as your personal income. It makes life (and by that we mean your business accounts and tax returns) a lot easier if you don’t get the two muddled up. Have a separate business bank account so you can track your cash flow. Online banking is highly recommended, and many accounts are free to create, with no minimum balance requirements or bank charges, unlike some of the more traditional high street banks.
3. Work with a monthly budget
Creating a budget will give you a clear financial framework in which to operate and grow month by month, year by year. It will help you plan your business income and expenses on a monthly basis, providing an overview of where your money is going, including any areas of overspend and underspend that need tweaking. Managing your budget is a simple yet smart way to stay on top of your finances and know how much you have available to invest in business growth. It also allows you to allocate regular sums to a savings ‘pot’.
4. Track your income and expenses
For any freelancer, it is absolutely vital that you know how much money is coming in and going out. Decide on how much you are going to charge for your products or services, and record your income either as you receive it (cash basis) or record impending payments (accrual). Track your expenses too – many are tax deductible and in order to take full advantage, you need to have a record of your costs. Make sure you keep all receipts in a safe place, so when it comes to the annual tax paperwork, you’re fully prepared.
5. Keep some money back for tax
Taxes are one of life’s necessities, and as a freelancer there’s no way of ignoring them. Many small business owners feel supremely uncomfortable about this area, but it doesn’t have to be this way as long as you’re prepared. Set aside a percentage (at least 25%) of your profits for taxes in a separate account. If you do this on an ongoing basis every month, it’s there when you need to pay it at the end of the year – no drama.
6. Plan for dry spells
Unlike employment where you know how much your monthly earnings are going to be, freelance work can be unpredictable. Your income will go up and down, even with a solid client base. Leaner periods are inevitable and they can last for weeks or even months. Getting into the habit of saving is one of the most important things you can do to protect yourself. Reaching out to former clients is another way to generate more business, and don’t underestimate the power of networking to engage with potential new clients.
7. Keep your books in order
While it may be tempting to put off bookkeeping in favour of more interesting business activities, leaving it too long just makes more work at the end of the year. Get organised and stay organised, with an easy-to-use filing system for all your appropriate business documents. UK tax laws require business owners to keep transaction records for at least 5 years. Set aside at least an hour per week to check on incoming payments, outstanding invoices and expenses to calculate your income, so you always know exactly where you are. There are lots of user friendly softwares now, such as Xero or FreeAgent that can help you stay on track.
8. Audit your cash flow and budget
Get into the healthy habit of carrying out regular audits, comparing the budget you set to your actual cash flow. Notice if there is a rise and fall, or specific pattern, in your income and expenses through the year that needs to be taken into account. Is Christmas a busy time of year? Does everything go quiet in August? Did you have an extended period of illness? Be open to amending your budget to help your business operations, including in case of unforeseen circumstances.
9. Manage your invoices
Getting paid on time is the lifeblood of all small businesses, which means having an effective invoicing process in place and dealing with it efficiently is top priority. Make sure you agree your payment terms with clients before you start work, and send out invoices immediately upon completion. Have a robust system in place that allows you to send initial invoices, follow up with reminders to clients who haven’t paid, and chase late payments, as this is the cornerstone of a healthy financial habit that will help your business to grow.
10. Use accounting software
Accounting software has come a long way over the years, and it’s really nothing to be afraid of. Platforms such as Xero and FreeAgent are easy to use and not too expensive, with invoicing systems and tax projection features while keeping track of banking accounts. And with HMRC’s drive for Making Tax Digital, it’s easy for freelancers to get their tax right and keep on top of their affairs. We usually recommend Xero cloud accounting software, and can even train you how to use it if you wish.
Freelancers and sole trader businesses can be perfectly capable of managing their own accounts and tax affairs, but if you need professional advice and guidance, Wellden Turnbull are here to help. Why not get in touch for a friendly chat to discuss you requirements for accounting and bookkeeping, tax advice and business planning.