Some freelance activities are fun, some not so much. Bookkeeping probably falls into the last category for many. But it doesn’t have to be this huge task that you forever put off then scramble to update at the last minute.
Just a few minutes every day will keep most freelance bookkeeping organised, so you can get on with the more dynamic aspects of building a business.
Keep it really simple
The biggest mistake most freelancers make is thinking that bookkeeping is complicated. It’s not. Especially if you’re working as a sole trader, your income is below the VAT threshold (£85,000 in 2020/21) and you don’t have employees. Here are the basic things you need to track:
- The date. Dead simple, you just need to know when the transaction took place.
- The item. What you bought or sold.
- The cost. How much is spent.
- Income. Everything anybody else pays you.
- Balance. This is a running total of money available in your bank account. Start by getting an accurate figure by looking at your latest bank statement. When you’re keeping track of your balance, remember to factor in direct debit or standing order transactions.
With just those five columns, you can stay on top of everything that’s happening with your finances. A notebook will do the job, an Excel spreadsheet will give you a digital record (you can have one workbook for the entire financial year and a new sheet for each month), or you could subscribe to an online accounting website where you can also send out and track invoices and prepare your end of year tax return. If the thought of a self-assessment tax return gives you shivers, an accountant can help.
Keep your receipts
Receipts and invoices are the next important things to take charge of in your freelance bookkeeping. HMRC accepts digital copies these days, so you don’t need to keep reams of paper for most things. Simply photograph or scan the receipt and digitally file your JPEG or PDF copy.
However, make sure your digital filing system is one you can understand otherwise it can get in just as much of a muddle as a traditional paper filing system. Form a backup habit, keeping copies in the cloud or on an external hard drive. Freelancers, and anyone else who is self-employed, must keep records for tax purposes for five years at least.
Be honest with yourself
Because it’s so important you keep good records when you’re a freelancer, don’t kid yourself you’ll keep up with it if you know in your heart you really won’t. Help is available and can save you many sleepless nights and anxiety.
It’s not that expensive to hire either a bookkeeper or an accountant, both of which can offer invaluable and practical advice.
If you’re struggling with your system, a bookkeeper can help you set it up and will take care of the day-to-day maintenance. Bookkeepers will also help you deal with invoices and payments depending on limits you both agree to. When you hire a bookkeeper you have the peace of mind of knowing that your books are ready to go to an accountant.
The tax accountant is the professional who will prepare your end of year tax return by sifting through your year’s records and digging out the relevant information. Accountants also have a wealth of experience that qualifies them to give some business advice if they notice areas where your money could work harder, or you could be more efficient. They will, for instance, make sure you’re claiming all your allowances, such as percentages of your heating bills if you work from home.
One final tip that will help keep your freelance bookkeeping as quick and easy as possible is to have a separate bank account for it. You won’t have to sift through personal expenses before you can get down to business, it will be easier to compile your tax return, and if you do use an accountant you won’t be showing them all your personal spending.
It really is worth getting to grips with bookkeeping for freelancers and it doesn’t have to be complicated. Once you know what’s happening with money you can course correct if things go wrong. You also have more chance of spotting upcoming big expenses so there are fewer nasty surprises that could undermine the success of your business.
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