I know. It’s one of the last things you want to read about, but it’s one of the most crucial parts of freelance success. Don’t worry, you won’t read anything about cash flow statements, balance sheets, or profit/loss statements – they’re complete overkill for the average freelancer.
Instead, I’m going to give you some easy-to-follow tips on managing your records throughout the month so it takes less work to figure out how much money you’ve made.
Keep track of your invoices.
If you’re not invoicing your clients, start now. An invoice is just a bill that says “you owe me this much money by this date for this work.” It's sort of like what the plumber sends after fixing your leaky pipes.
Don't have an invoice template to use?
- Jenn includes an invoice template in her Web Writer’s Guide workbook.
- You can find invoice templates online by doing a search for "invoice templates."
- There is software specifically designed for invoicing. For example, I use MacFreelance.
- Use Paypal's invoice tool.
- Create your own invoice template in Microsoft Word. (Tip: save as .dot file.)
Prepare and send your invoices soon after your project is complete, or before the project is done if you require advance payment. Make sure your clients get their invoices and make sure you keep a copy for your records. I keep both electronic and hard copies for added security. (You never know when your computer might crash or your house burns down and hopefully they don't both happen at the same time).
Follow up on unpaid invoices.
Get a file folder and label it “2009 Invoices.” (You need a new folder every year.) As you receive payments from clients, mark your invoices as “Paid” and file them away. Periodically review your invoices and follow up on those that remain unpaid.
Track your expenses.
When you shop for your business items, like office supplies, shop only for business. Save your personal shopping for another trip and expense tracking will be much easier. Keep receipts for all your purchases, even if you have to print them from online.
I put all my receipts in an envelope until the end of the month when I total them up. After that, I file them away based on their tax categories, e.g. Advertising, Travel, Food, etc. (See About.com Tax Planning for a list of tax-deductible business expenses.)
Add up your net income each month.
Earlier, I talked about all those useless spreadsheets you might have learned about in your college Accounting class. I still use a spreadsheet, it’s just far more simple than anything I’ve ever learned about in school. My spreadsheet has 4 rows, 13 columns, and looks similar to this:
It's such a simple chart, you could just draw it out on a piece of Notebook paper. (But then, you wouldn't be able to put in a formula to calculate your Net Income.)
At the end of each month, I add up all my paid invoices and all the expenses I've paid. Then, I subtract expenses from income to get my net income - that’s how much money I made that month. I try to generate income two months in advance of spending it. For example, what I make in October is what I pay myself in December. It gives me peace of mind knowing the bills are covered for the current and next month.
Writer You Are, Accountant You May Not Be
Of course, DIY accounting is not for everyone. Some of us need accountants and there’s nothing wrong with that. Make sure you get someone who has experience working with self-employed individuals and that it’s someone you can afford. Ask for referrals from friends and family members. When you find someone you like, get a few references to see how satisfied their other clients are.
Making the System Work for You
Doing your own accounting and bookkeeping can be time consuming, especially in the beginning as you're working out a system. Once you pass that hump, you should be able to cut down your accounting time to 4-8 hours a month. Filing things away during the month makes the process a lot easier than having to spend an entire day looking for receipts and invoices only to spend another day sorting and adding them.
As your business grows, continually evaluate whether it makes sense to continue doing your own accounting or if it’s time to get some outside help.
Are you your own accountant? What are your accounting and bookkeeping practices like?