A freelancer’s life is like a rollercoaster ride. You’re cash-rich one day, then, you’re struggling to pay the bills the next day.
That is the reason why understanding accounting and bookkeeping processes is beneficial. In doing so, you can keep track of unpaid dues. Also, you won’t be missing out on client billings and you’ll see your operating cash flow status easily.
As a freelancer, accounting and bookkeeping provide you with a quick view of your finances, especially when transactions are updated regularly. Thus, if you find yourself racing against the clock in maintaining your accounts, investing in bookkeeping and accounting toolkits will liberate you.
Here’s a guide to managing your money—the better way:
1. Separate Your Private And Freelancing Funds
One of the very first steps you should take as a freelancer is to classify your private funds from the ones you receive from freelancing.
Differentiating your funds makes accounting and bookkeeping simpler. This is because when it comes to taxes and evaluating financial growth, you won’t have to dig under which finances are personal or earnings from freelance jobs. Keeping your private and freelancing accounts separate can also save you when going through tax compliance audits.
In going about separating your accounts, there are two best alternatives to take. The first one is to open an additional account with the current bank you are partnered with and use it to channel freelancing profits and carry out expenditures. The second option would be to find a different bank to use only for your freelancing. When signing up for a different bank, have one that allows online transactions. Search for a bank that offers free registration and has no minimum deposit requirement.
2. Come Up With A Budget
Having a budget is crucial for your freelancing career no matter what stage you’re at.
Essentially, budgeting isn’t only a useful management tool; as a freelancer, it can also aid in navigating the peaks and troughs of your finances. When you earn high this month and have a terrible patch two months later, a budget ensures that you don’t splurge too much during your good months and thrive through during the bad ones.
In planning your budget, it’s better to base it on your estimated monthly income. From that value, you can allocate which goes to expenses, bills, savings, investments,etc.
It’s necessary to check and continuously adjust your budget to make sure it works better for both you and your freelance job.
3. Check Your Finances Regularly
Your budget, even a well-planned one, won’t do you any good unless you stick to it. Make it a habit to regularly check your budget and financial statements to make sure that you don’t spend more than you earn. It’s also important to note that, sometimes, clients may not pay on time, which usually requires last minute corrections. Checking your finances regularly helps you in adjusting sooner, thereby mitigating further financial loss.
4. Make And Send Invoices Promptly
One significant advantage of having updated financial statements is to get paid quickly. To most freelancers, receiving payment is a significant problem; however, accounting and bookkeeping tools can help.
Drafting and sending invoices through email is a piece of cake. Using the right tools, getting paid on time is just a matter of click and send. Also, reliable accounting and bookkeeping tools streamline your freelancing process by enabling you to do the following.
Identify Late Payments Easily
Updated accounts allow you to identify who owes how much and which invoices are overdue.
Set Reminders Both For Yourself And Your Clients
Whenever an invoice nears its deadline, you will immediately receive a notification. You can also send automatic notifications to your clients with an efficient accounting system.
Chase Payments Politely But Firmly
If you have done your work and as per the required standards, clients are obligated to pay. Don’t be uncomfortable to chase out billings. It’s money you’ve earned, after all.
5. Pay Taxes As A Freelancer
Frequently, tax payments are your most considerable expense. Each year, these fees are charged starting April and every three months after. Remember to set sufficient cash every pay period to cover taxes on time.
If you don’t want your bills to be considered delinquent, it’s imperative to pay your income tax on a timely manner. When your payments are delayed, the IRS (Internal Revenue Service) can owe you fines for late payments.
6. Track Your Spending
While what can be considered as freelance expenses vary from case to case, there are many things you can assert as work-related expenses. And, suggesting expenditures makes it possible to track them out.
Monitoring your expenses could be a cumbersome process that can be easily pushed aside. However, doing so is crucial since you don’t want to do it all half-baked when the year ends and it’s time to pay your taxes.
Monitoring your expenditure means classifying what type of cost is a specific entry (advertising, client acquisition, etc..) and, more importantly, preserving your receipts.
7. Keep Track Of Your Time
Tracking your working hours will enable you to see how much you’re actually making, as well as determine what your pricing strategy should be. An effective accounting and bookkeeping software can help you on this matter. With concise and data-driven reporting functions, you’ll get to know how much work you’ve rendered within a particular period. You can use this information to back up your rates, thereby maximizing your earnings along the way.
For instance, if you think that you’re earning less than what you originally intended, you may adjust the amount you’re charging your clients per hour
8. Set Aside Money For Savings
Freelancers are all too acquainted with clients that don’t make payments on time. Also, most freelancers are no strangers with lean months of having no work. Thus, saving extra money can be a lifesaver.
When you’re working full-time as a freelancer, save the spare funds anytime you get a huge win. You’ll be grateful to have done so once you’re strapped for cash. Cutting costs and saving will safeguard your finances during low-income times.
Freelancing is an all or nothing career—you earn based on how much work you’ve done. Although the career choice is lucrative, some bumps are inevitable along the way.
To help you overcome the hurdles that come with freelancing, remember to diversify your funds, separating your personal money from your earnings on freelancing, and rigorously track whatever comes in and out of your funds. Also, be wary of your tax payments, and never forget to invoice clients promptly and firmly. Furthermore, seek the help of a reliable accounting and bookkeeping software so you can better manage your finances.