As a small business owner, you likely work as a one-person army, managing everything from product designing and budgeting to admin work and marketing. After all, you want to offer exceptional products and services to clients.
But keeping up with emails or maintaining databases takes time and energy, dividing your focus from customer acquisition and retention. So how do you launch efficient operations and automate admin and financial work? Enter bookkeeping.
Bookkeeping helps you record all your business transactions so that you don’t have to enter data into spreadsheets manually. But it requires specialized knowledge. Unless you have training in accounting, freelancer bookkeeping requires a learning curve.
But you can get ahead of the curve by breaking this work into essential financial records and setting yourself up with the right tools. Here’s a complete guide to bookkeeping for self-employed people.
7 essential financial records to have on hand
Bookkeeping is typically associated with math, taxes, and accounting. And you’re right to think these are integral aspects of bookkeeping tasks. But the practice exists to make your life easier, not more difficult. So record your business’ transactions because when it’s time to file taxes or balance accounts, this paper trail will provide evidence for your calculations.
Here are seven essential records small business owners should maintain:
- Invoices and receipts: Preserve all bills you send to clients and payment receipts. These documents help you calculate income, and should a client dispute a bill, you know where to look.
- Bank statements: Bank statements, especially if you have a separate business account, provide an excellent record of your income and expenses. Use these documents to track and project earnings, review business costs, and ensure clients have paid you.
- Business credit card statements: Credit card statements are another essential expense-tracking document. They allow you to view all your credit charges and payments toward your monthly balance.
- Tax returns: Your tax returns serve as proof of income, and you may need to provide this information to secure a loan. And you would need to provide these documents during an audit, so it’s wise to keep them for at least three years, which is the IRS’ audit period.
- Profit and loss statements: Sole proprietors must also report profits and losses when filing self-employed taxes on a Schedule C document. Holding on to profit and loss statements will help you (or your accountant) file correctly.
- Inventory records: Small business owners should keep inventory logs for tax preparation, as the IRS considers stock an asset. In some U.S. states, you have to pay taxes on inventory.
- Mileage logs: Mileage logs help you record mileage and odometer readings as well as estimate commutes and work travel expenses. Self-employed people can usually write off mileage on their taxes, so creating those logs is in your best interest.
How to maintain self-employment records
Stashing profit, expense, and inventory documentation will help during tax season, but fail-proof (or, better yet, “file-proof”) bookkeeping requires consistency and best practices. Here are a few bookkeeping tips and procedures that streamline accounting for freelancers:
- Separate business and pleasure: Keep a bank account solely for business transactions. This way, you can easily view income and expenses and calculate profits and losses. A business account makes you a better candidate for a loan, as banks can assess your company’s earnings in one place. You’ll potentially save yourself some liability trouble by not mixing personal and professional funds and expenses.
- Follow up on invoices: Your cash flow and, in turn, ability to operate depends on your income (and your income alone). So follow up on invoices, institute clear policies and penalties for overdue payments, and receive payments using a secure, user-friendly platform like Practice.
- Keep those receipts: You’re excellent at storing invoices, bank account statements, and tax returns but also hold onto your receipts. Any time you fill up your gas tank on a work trip or buy office supplies, save purchase proof. This helps you save some money during tax season, as you can show expenses in deductions.
- Automate your bookkeeping tasks using software: Use accounting software for self-employed people like Quickbooks, Honeybooks, Xero, or Freshbooks, which facilitate invoicing, expense and inventory tracking, and document creation (such as profit and loss reports).
- Make quarterly estimated tax payments: No one wants to get hit with a big tax bill at the end of the fiscal year. Since self-employed individuals don’t work for a company that withholds taxes on their behalf, it’s smart to make estimated quarterly payments to soften the blow of a single annual payment.
- Use your bookkeeping to make better decisions: You have records of your expenses, earnings, cash flow, taxes, and inventory, so use them to make wise decisions. For example, if you spend too much to earn a profit, you know you have to rethink your operations. Or, if you run out of inventory on popular items quickly, it’s time to adjust your supply chain operations.
When should you outsource to a pro?
All small business owners and freelancers should maintain excellent records, regardless of whether they do their own bookkeeping. But seeking a professional’s help can save businesses money by spotting inefficiencies and mitigate tax audits by filing complex forms correctly. Many prefer to consider bookkeeping a team effort between a financial professional and a business owner.
Consider hiring an accountant or analyst if:
- You need help learning how to use your account software.
- You want guidance while entering data into software.
- You’re unsure how to file your taxes correctly or estimate IRS payments.
- You want a third party to handle invoicing and payment.
- You make operational changes and need professional help identifying opportunities to save money and minimize inefficient work.
- You need assistance legally registering your business.
- You want to learn how to prepare documents, such as income statements, balance sheets, profit and loss statements, and account charts.
- You aren’t fully taking advantage of tax deductions and breaks a professional could find.
- You have to file compliance paperwork.
The good news is that internal bookkeeping effects are never for naught, even if you decide to work with a professional. That information and documentation will be invaluable to an accountant or analyst, and they’ll be grateful for your detail-oriented approach.
Keep learning with Practice
At Practice, we appreciate your hard work and efforts toward running your business. That’s why we created a customer relationship management (CRM) tool to streamline administrative procedures like databasing and payment.
Our Client Management Software, designed with small business owners and coaches in mind, allows you to securely receive payments, book appointments, and store files and contracts –– all in one place.
We also created a library of educational materials on our blog with content that helps freelancers improve everything from communication to accounting skills. Make more informed decisions by continuing to study bookkeeping basics or the ins and outs of independent contractor work. Try Practice today.