Business bank accounts, company cards, accountants and jazzy bookkeeping software – stuff only the big shots have right? Nope.
As a freelancer working solo it’s a common misconception that all those things are for ‘proper businesses’ – the kind of businesses that have suits and ties, accounting departments and meeting rooms.
That may well have been what defined businesses in the past but things have changed. The freelance and gig economy has boomed over the past few years, for better or worse.
Whatever your reason for going freelance and no matter how small your operation is – you are in fact a ‘proper business’ nowadays. Even if you’re barely making money and need a day job on the side, you’re still running a business at the end of the day.
Now we’ve established that you’re an entrepreneur (maybe a hesitant one), it’s time to get real about business. It’s easy to disregard formal business tasks when it’s just you alone, especially if you’re doing this as a hobby too.
Managing finances and doing bookkeeping is probably not what got you interested in freelancing in the first place. Unless you’re a freelance accountant, the words bookkeeping, accounting and expenses are probably not going to get you excited any time soon. However, they are things you can’t afford to ignore.
Recording, managing and organising finances doesn’t come naturally to us all but the good news is that you don’t have to be a financial whiz or an accounting genius to get this right. We’ve got some tips to help you out.
Keep a record of everything (yes everything)
No expense is too small. Make a note of every paperclip and staple you spend money on. While little bits here and there might seem like nothing, they all add up.
So does the unnecessary tax you’re paying for the pleasure of owning a pen (VAT and income tax).
Keeping a note of all the money coming in is important because you’ll be paying tax on your profits (usually 20%).
However, in order to reduce the amount you owe in tax, you’ll need to keep a record of all your expenses coming out of the business too.
Expenses = not profit.
Say you charge £100 for a service, but you spend £10 on goods needed to provide that service – you’re making only £90. You shouldn’t be taxed for £100 because you didn’t make £100 profit. Reducing your profit levels (within reason) can cut an unnecessarily large tax bill down to size (legally of course).
An easy way to keep track of everything is to get hold of bookkeeping software that allows you to upload receipts so you’re not losing information and proof of expenses you want to claim for.
Separate bank account
Working solo means your usual bank account is all you need right?
Having all your personal finances mingled with your business finances might seem easier – right up until you need to do bookkeeping and claim for expenses. Try separating your personal and business expenses for the year come tax time and you’ll soon be desperately queueing at the bank to open another account.
Once you’ve got a separate business account, it’s much easier to do your bookkeeping. With modern bookkeeping software you can simply link up your bank account and pull transactions over automatically, rather than filling them all in manually.
Set aside money for taxes
You need to pay tax unfortunately and the last thing you want to do is realise you’ve got a whopping tax bill in January and have no means to pay for it. (This is more common than you might think!)
So we’d recommend you get in the habit of setting aside a percentage of everything you make into a separate savings account – roughly around 30% to cover income tax and National Insurance. The percentage you’ll need to pay will depend on how much you’re making. No tax is due if you’re earning under £1,000. You can check the income tax and National Insurance rates on the government’s website.
Get an accountant
Not many people, without a background in accounting or a lot of experience, feel 100% comfortable doing their accounts themselves.
There’s always a lot of umm-ing and ahh-ing over which bits of tax legislation are applicable to you and what your individual circumstances mean for your accounts.
While there’s a lot of handy information online, they don’t take your circumstances into account and sometimes you need someone to give you personalised advice. If you’d like to get in touch with an accountant who specialises in businesses like yours, The Accountancy Partnership offer low fees and access to your own personal accountant.
Have you found yourself struggling to get financial savvy? What have you struggled with the most? Please share your thoughts.