When you decided to quit your day job and go full-time as a solopreneur or freelancer, there’s a good chance you did this to be able to focus on your craft and help more people.
You then realized how much administrative and bookkeeping overhead goes into running a business. This can be overwhelming when balancing a full roster of clients. Let’s face it—spending all day filling out expense reports and tracking your business numbers in spreadsheets is about as fun as getting a root canal.
However, knowing your numbers is crucial if you want to run a successful business.
Lucky for you, there are a lot of resources and online accounting tools you can use to make all of the bookkeeping tasks easier.
In this post, we’ll be specifically looking at how you can save time with four essential bookkeeping tasks—invoicing, time-tracking, taxes, and profit and loss statements (P&Ls).
Why Is Bookkeeping Important?
If you like your freedom and want to be in business for the long overhaul, you should prioritize bookkeeping. That’s because it can help you ensure that you stay in business and avoid any unpleasant tax surprises. This can range from expensive fines and tax penalties to jail time if you lie on your tax forms or don’t pay your taxes for a while.
Here are four aspects of bookkeeping you need to pay attention to:
Invoicing is always the fun part of freelance work. You landed the client, you’ve completed the desired work, and now it’s time for you to get paid. Cue happy dance.
Whether it’s your first invoice or your 250th, sending out invoices should be painless.
Accounting software like Quickbooks Online, Quickbooks Self-Employed (explicitly designed for freelancers and solopreneurs) and WaveApps all do a great job at both invoicing and organizing all of your expenses.
As a freelancer, you are responsible for managing your time and completing all projects on deadline. No boss is standing over your shoulder telling you what to do next or to get off Instagram and do some real work. It’s all on you.
It can be helpful to know how you are spending your time, be it informally through a journal or a tool like Rescuetime or more formal time-tracking tools like Harvest and Freshbooks Lite.
Pro Tip – Check out this guide to learn more about some of these time-tracking apps.
When you know how much time you spend on a given task, you can reflect this in your pricing.
Many people believe taxes to be the bane of their existence. With a 9-5 job, doing taxes can be a little bit easier. For freelancers and solopreneurs, it is a lot more involved as you are not only filing taxes but also having to figure out what you can legally deduct, as well as figuring out how much to pay in quarterly taxes.
If you use a tool such as Quickbooks, it can automate some of this work, including giving you a quarterly tax estimate as well as helping you file your tax return electronically.
However, this process is complicated. As soon as your business is profitable, I’d recommend hiring an experienced accountant to help you file your taxes each year. This will cost you a few hundred dollars, but they can end up saving you a lot more in taxes, such as helping you figure out what you can legally write off on your taxes such as your cell phone bill or a portion of your rent or mortgage if you work from home.
4. Profit And Loss Statements
A profit and loss statement (or P&L) is a document that tells you how much money you made.
In short, a P&L aggregates in all of your revenue and business expenses for a given year. Then if you subtract your expenses from your total revenue, that’s your profit margin.
A good rule of thumb is to ensure that your profit margin is hovering at or above 25%. Some freelancers may see their profit margins above 50%. Others—especially e-commerce entrepreneurs—may see their profit margins around 10%. It really depends on your specific business, your pricing, and any investments you are making in the future of your company.
Your P&L acts as a safeguard to ensure that your business is actually sustainable and stays profitable.
What to Do if You Discover Your Business Isn’t Profitable
One of the downsides to keeping good track of your income and expenses is getting bad news—you might not be making as much money as you thought.
If you discover that your business is losing money, here are some things you can do.
- Evaluate your pricing model(s). Do you need to raise your prices to account for the amount of time you are spending on each project?
- Go through your credit card statements and cancel any monthly subscriptions you aren’t using. These can quickly add up.
- Call your Internet and cell phone providers and negotiate a lower rate.
- Work with a business coach or mentor to find new income streams.
- Improve your marketing and networking to bring in new (and better) clients, and be sure to follow up with existing ones.
- Consider teaching an online course or finding other forms of passive income.
Bookkeeping Is Planning for the Future
While you probably didn’t get into business excited about bookkeeping tasks, it’s one of the most important things you can do as a business owner. Having a handle on how much money you are bringing in, what you are spending it on, and your tax situation can be the difference between running a thriving business and hustling frantically from invoice to invoice just to make next month’s rent.
The better you have a grip on your money, the more you can focus on your work and success.