For self-employed individuals, one of the challenges of managing your finances is having a clear and accurate oversight of your transactions–and failure to do so may hamper your business growth. This is where bookkeeping goes a long way.
In essence, bookkeeping is the process of recording your financial transactions as soon as the money changes hands. But it goes well beyond just that: bookkeeping also involves planning your taxes, creating budgets, keeping up-to-date with client payments, maintaining your chart of accounts, and so on.
This article will demonstrate what bookkeeping is about, why it is crucial in your freelancing business, and what bookkeeping components you need to be aware of.
What is Bookkeeping?
Bookkeeping is the process of tracking, recording and maintaining your financial transactions in an accurate and systematic manner. It is the foundation of an effective accounting system, providing the data needed for making informed business decisions.
Furthermore, bookkeeping involves classifying and summarizing financial data and preparing financial statements, such as balance sheets and income statements. It also includes reconciling bank statements and tracking accounts payable and receivable.
Bookkeeping provides an accurate record of your financial activity and is used to track spending and measure the success of your freelancing business. With it, you may create long-lasting value for your career and your clients.
Bookkeeping vs. Accounting: What’s The Difference?
Bookkeeping and accounting are often used interchangeably. While they are two related terms, they are distinct fields in financial management.
Bookkeeping helps you track and monitor your financial transactions, such as sales, purchases, and payments. It accurately tracks and documents financial data, such as income and expenses.
Meanwhile, accounting is the process of using the information recorded in bookkeeping to analyze, interpret, and communicate a company’s financial information. This includes creating financial statements, such as balance sheets and income statements, and analyzing trends in the data to provide valuable insights into the financial health and performance of a company.
In short, bookkeeping provides the raw data, while accounting uses that data to provide a broader picture of the financial status and performance of a business. Bookkeepers ensure accurate financial data is available, while accountants use that information to provide valuable insights and make informed financial decisions.
Importance of Bookkeeping
Since money is king, businesses need to bookkeep the flow of their cash in a more systematized way. Here’s how effective bookkeeping can help you.
1. Set your service rates right based on your skill set.
Bookkeeping plays an essential role in helping freelancers set their service rates. Having accurate financial data allows you to monitor the costs, revenue, and profit margins.
On top of that, bookkeeping helps you make informed decisions about your pricing–if it’s time to raise your charges according to market demand–and ensure you are running a financially healthy business.
Bookkeeping is essential in maintaining your business’s financial records and identifying earnings trends. The information you gathered can be used to determine the optimal rate for your services, considering the market demand and competition.
2. Reliable measure of performance.
Bookkeeping helps you track your financial performance over time, allowing you to identify trends and tap new opportunities. For example, if you notice a decline in your earnings, you can take steps to adjust your pricing or find new clients.
For instance, while inflation is slowly easing, some prices of goods are expected to soar in 2023, which may indirectly affect your finances. You may need to increase your rates to meet the market where it’s at and ensure you’re being paid what you’re worth.
But if you’re not tracking and recording your expenses, you wouldn’t know how inflation is taking a toll on your business, and you may be giving yourself an underserved pay cut.
3. Keep your ledger accounts up-to-date.
An updated ledger provides a clear and accurate picture of your business’s financial performance, which is vital for monitoring and improving performance over time.
When you have an accurate picture of your business’s financial performance, it becomes easier to plan new growth strategies and invest in additional resources–such as manpower or technology.
4. Make general strategic decisions for its revenue and income goals.
As you map out your freelancing strategy throughout the year, bookkeeping can help you make sound decisions that boost your income. This is because you can leverage accurate financial records that help you get a better understanding of your cash flow and decide on your next course of action.
Aside from that, bookkeeping provides valuable information about your expenses, including what costs are necessary and what costs can be reduced. By identifying these areas, you’ll know when to minimize costs without compromising the quality of your services.
5. Access to detailed records of all transactions.
A comprehensive record of your income and expenses lets you see how much money is coming in, what costs affect your bottom line, and how you can optimize your spending to increase your profits.
Having a single pane of glass for all your financial transactions will help you make better business decisions that will eventually pave the way for your growth.
6. Better tax preparation.
Having accurate records of your transactions is essential for tax compliance. With detailed records, you can ensure that you are reporting your income and expenses accurately, reducing the risk of penalties and fines from tax authorities.
This is where bookkeeping comes in: it helps you stay organized and reduces the stress of tax preparation. With all financial records in one place, you can easily find the information you need when preparing your tax return, and minimize the risk of missing important information or making errors.
7. Keep your personal and business finances separate.
By separating your personal and business finances, you are able to provide clarity, accuracy, and credibility to your business operations. By keeping your personal and business accounts separate, you can effectively utilize money-saving strategies and churn out tax returns for your freelancing business.
Basic Accounting Methods
There are two basic accounting methods that you can use to record and analyze your financial transactions: the cash basis method and the accrual basis method.
A cash basis method records transactions when cash is received or disbursed. In other words, income is recorded whenever a payment is received, and expenses are recorded whenever a payment is made.
This method best suits new small businesses and individuals with a simple financial structure.
The accrual basis method records transactions whenever they are incurred, no matter when the payment is collected or made. Through this method, income is recorded when it is earned, and expenses are recorded when they are incurred, regardless of when payment is made.
Compared with the cash basis method, the accrual option provides a more accurate picture of a business’s financial situation, as it takes into account all transactions, regardless of whether you have received or made payment.
Take note that the method you choose will impact the timing of your income and expenses recognition and affect your financial statements, so it’s essential to choose the method that best fits your business needs.
Types of Bookkeeping for Small Business
The type of bookkeeping method you choose largely depends on the complexity of business operations as well as its size and financial needs. There are two types of bookkeeping you can choose from: single and double-entry systems.
Single-entry bookkeeping is a basic accounting method that involves recording financial transactions in a single ledger or journal entry. This method records transactions only once, usually as a debit or credit entry in a check register or a similar record-keeping tool.
This type of bookkeeping is simple, making it suitable for those with a low volume of transactions and a simple financial structure.
If you want a more in-depth and systematic way of recording your transactions, you may want to opt for double-entry bookkeeping.
Double-entry bookkeeping is a more advanced accounting method that involves recording financial transactions in two separate ledgers – a debit ledger and a credit ledger. This method records each transaction twice – once as a debit entry and once as a credit entry.
Double-entry bookkeeping aims to provide a more accurate and comprehensive record of financial transactions. By recording each transaction twice, the system ensures that all financial transactions are captured and accounted for, reducing the risk of errors and discrepancies.
Double-entry bookkeeping makes it easier to reconcile your financial records, ensuring that your accounts are accurate and up-to-date. This can also help you to minimize your tax liability by accurately tracking and reporting your income and expenses.
Components of Bookkeeping
Bookkeeping comes with a set of responsibilities you need to stay on top of. While it’s mainly concerned with the timely documentation of the money that goes in and out of the business, it involves a couple more things.
1. Documenting every financial transaction.
Freelancers need to document every movement of their money–whether used to pay bills or purchase new equipment.
When you document every financial transaction, it provides transparency and accountability in your business dealings. Also, you’ll have proof in the event of a dispute. If a client ever questions your work or payment, you’ll have the evidence you need to support your case.
You can use various tools to record your transactions, from spreadsheets to bookkeeping tools. Regardless of the method chosen, it’s important to keep detailed records of all financial transactions, including income, expenses, and payments. This will allow you to manage your finances effectively, comply with tax laws, and prepare accurate invoices for your clients.
2. Recording all debits and credits.
Keeping track of debits and credits helps you maintain an accurate and up-to-date record of your finances. This information is crucial in determining your overall financial performance and making informed business decisions.
Additionally, it’s an effective way to maintain a positive cash flow. By knowing your incoming and outgoing transactions, you can identify areas where you need to spend less or invest more.
3. Sending invoices and processing payments.
Bookkeeping also involves sending invoices to your clients and processing payments to your suppliers.
Invoicing helps you manage your cash flow and track payments from clients. Having a record of all invoices sent lets you quickly see which invoices have been paid and which are still outstanding. Through invoicing, you can rest assured that you receive payment for your work.
4. Preparing financial statements.
Financial statements are written reports that summarize your financial performance and position. There are three primary financial statements:
- Balance Sheet: A balance sheet gives you an overview of your financial position at a given point in time. It lists your assets, liabilities, and equity, showing how your assets are financed through either debt or equity.
- Income Statement: An income statement summarizes your financial performance over a specific period, typically a month or a year. It shows your revenue, expenses, and profit or loss.
- Cash Flow Statement: A cash flow statement demonstrates the inflows and outflows of your cash. It shows the sources and uses of cash and helps you understand your liquidity and ability to pay debts.
When you regularly prepare financial statements, you gain a holistic overview of your business’ financial performance.
5. Maintaining and balancing a general ledger.
A ledger is a record-keeping system that provides a complete and permanent record of all financial transactions. The ledger account serves as a central repository of all your financial information and organizes and categorizes transactions into accounts.
Maintaining a ledger effectively can help you stay organized and make informed decisions about your business. Here are some tips to keep a balanced ledger:
- Choose a ledger system that works for you. You can use manual ledgers, digital ledgers, or accounting software to maintain your ledger.
- Record all transactions promptly. Stay on top of your finances and minimize the risk of errors.
- Classify transactions into appropriate accounts. Determine if your transactions are classified as revenues, expenses, assets, liabilities, and equity so you know how to compute them.
6. Conducting day-to-day banking activities.
Bookkeeping also involves keeping tabs on your daily financial activities in the bank, such as issuing check payments to your suppliers or withdrawing funds. It also consists of reconciling your bank accounts and ensuring your credit card balances are paid on time. Doing so will help keep you from paying bank fees and prevent bouncing checks.
7. Completing payroll functions.
In case you work with a team of other freelancers, bookkeeping allows you to manage payroll more effectively. You can pay for your workers’ services on time and within budget. It provides the information needed to pay your suppliers, including hours worked, overtime, bonuses, and other fees.
Furthermore, it helps support budgeting and financial planning for your business. You don’t want to get additional services you know you can’t afford to pay for.
As a freelancer, bookkeeping is a critical part of your business operations. It provides the information you need to manage your finances effectively, comply with tax laws, and make informed decisions about your business.
By keeping accurate financial records, you can have confidence in the information you use to get more clients and grow in your expertise.
Not sure where to start? Finance management tools like Beppo can be a helpful resource for freelancers looking to streamline their bookkeeping processes. Beppo simplifies the process of recording transactions, generating financial reports, and reconciling your ledger with your bank statements.
With its robust set of features and easy-to-navigate user interface, Beppo makes it easy to keep your finances organized and up-to-date. Whether you’ve been freelancing for a while or new in the industry, Beppo can help you manage your finances effectively, so you can focus on what you do best – your work.