Let’s talk about bookkeeping, shall we? No, you don’t want to? You’d rather watch the Star Wars prequels on repeat with epics lines such as…
“I don’t like sand. It’s coarse and rough and irritating and it gets everywhere.” – Anakin Skywalker
Ready to talk about bookkeeping now? Good, because bookkeeping is one of the most crucial, yet overlooked aspects of your business finances. And while it’s not the most riveting of subjects, getting to know your bookkeeping will seriously help you level up your tax and financial game.
What is bookkeeping?
Bookkeeping is the financial recordkeeping aspect of your business. It’s keeping track of all the money that comes in and goes out.
Your business’s bookkeeping is like Destiny’s Child. There are three main parts that, when put together, makes a perfect harmony (and some killer dance moves).
Income and expense tracking is recording and categorizing all the debits and credits in your bank accounts. This is the Beyonce of your bookkeeping: the most recognizable face and what most people think of when they hear the word bookkeeping.
But don’t be fooled. Just like Kelly and Michelle are integral parts of Destiny’s Child, so are the other two aspects of your bookkeeping: accounts receivable and accounts payable. How you keep track of your accounts receivable and accounts payable is also part of your bookkeeping.
Accounts receivable is the tracking of all of the money that other people OWE YOU, which will likely be your invoicing and payments systems.
Accounts payable is the tracking of all of the money that you OWE OTHERS. In other words, these are the bills, bills, bills that you have to pay to your contractors or vendors.
Why bookkeeping is important
Wait, wait, I know this one! It matters for taxes, right?
Yes, bookkeeping is an important part of taxes. You DO need to know how much money you made and spent (and in what deduction categories) when you file your taxes. BUT doing your bookkeeping, and doing it regularly, is for more than just taxes.
Bookkeeping helps you keep track of all your vital tax deductions.
Tax deductions directly impact how much money you pay in taxes every year. If you miss tax deductions, you run the risk of paying more in taxes. And what’s the easiest way to miss tax deductions? By rushing through your bookkeeping the day before taxes are due.
Regular bookkeeping also helps you catch bank and payment errors.
Sometimes, funky things happen in our bank accounts and, if we’re not paying attention, they can cost us down the road. Or clients pay us the wrong amount…or not at all.
I once had a client who didn’t track his invoice payments properly (which is accounts receivable, a.k.a. the Kelly, of your bookkeeping). The result was that he had invoices that he thought were paid, but weren’t! Because so much time had elapsed since he billed his clients, he was unable to recover the payments.
So, as you can see, keeping up with your bookkeeping ensures that any financial errors get caught early on and are easy to fix.
Bookkeeping helps you understand the financial story of your business.
Understanding how you make money, which income streams are the most successful, and where you are spending your money helps you make important decisions in your business like:
- What new product or services to offer
- What areas of your business you should invest in
- What marketing strategies are working (and which are not)
- Where you are overspending and need to cut back
Choosing a bookkeeping system
The very first step to getting started with your bookkeeping is to choose a bookkeeping system for your business. And before you whip out that green ledger and groan, know that digital accounting software, like QuickBooks Online, has seriously changed the bookkeeping game.
From downloading transactions directly from your bank, to digital invoicing and online payments, programs like QuickBooks Online automate aspects of your bookkeeping and shave HOURS off your routine. Take those hours that you would have spent manually typing numbers into a spreadsheet and spend them binge-watching something on Netflix instead.
Plus, digital bookkeeping programs keep all your financial data in the cloud. Cloud-based systems mean that you can do your bookkeeping anytime (no more boring Lyft rides for you!) and that your data can easily be shared with your financial pro.
Bookkeeping tips for freelancers
Ready to jump into your bookkeeping? Here are my top three bookkeeping tips and how they’ve impacted pro freelancers just like you:
1. Keep business and personal transactions separate
You know that Offspring song that goes, “You gotta keep ‘em separated”? Get it stuck in your head now because that song should be your mantra for your business and personal bank accounts.
Keeping your business and personal account separate is CRUCIAL to keeping your bookkeeping manageable.
While it sounds counter-intuitive, having separate accounts reduces the amount of work because you only review transactions in your business accounts. Instead of going through hundreds of transactions, searching for the 15 that actually have something to do with your business, those 15 transactions are waiting for you in your business account.
Plus, you know that every single transaction in your business account is business related. Which means you’re not clicking through your calendar trying to figure out if that trip to Costco was for a handle of Bacardi or for printer ink.
Even if you opt to hire a bookkeeper, keeping your personal and business transactions separate will save you big bucks. Most bookkeepers charge hourly, which means the more transactions they need to sift through, the more you’ll pay.
After a year of being in business, Megan hired me to catch up her bookkeeping, which had been neglected. Megan only had one checking account, which she used for personal and business transactions. It took me 18 hours to do her bookkeeping since I had to comb through every single transaction to check if it was a business expense.
The next year, she opened a separate business checking account. I also did her bookkeeping that year, and it only took me 10 hours. The cost of the bookkeeping was nearly cut in half just by opening a business checking account.
2. Do your bookkeeping weekly
Doing your bookkeeping weekly ensures that you catch and address any bookkeeping errors before they become a tangled mess of ick.
It also ensures that your bookkeeping doesn’t pile up and become so overwhelming that you avoid doing it. It’s A LOT harder to get started when you have 50 transactions to categorize rather than five.
Remember, the easiest way to miss tax deductions is by waiting to do your bookkeeping until right before tax time. That’s when you cut corners and intentionally let things slip through the cracks because you want to get the bookkeeping over with.
Creating a regular bookkeeping routine means that your taxes are more accurate and you save more.
Doing your bookkeeping weekly also strengthens your bookkeeping muscle. Like the muscles in your body, the more you exercise your bookkeeping muscle, the stronger it becomes. Over time, your bookkeeping will become easier, faster, and you might even *gasp* enjoy doing it.
For years, Vivan didn’t have a bookkeeping system and ignored her bookkeeping until it was time to file her taxes. Then, she rushed through her bank statements and captured only her major expenses, forgetting about her smaller day-to-day expenses. She was only claiming half of her tax deductions.
After getting set up in QuickBooks Online, Vivan developed a weekly bookkeeping routine and stuck to it. Now her books are updated weekly, and every single expense is accounted for. When she files her taxes, she no longer spends hours reviewing bank statements; instead, just runs a report and sends it to her tax person.
3. Hire professional bookkeeping and tax resolution help
Just because you’re doing your bookkeeping yourself doesn’t mean that you should feel like you’re stranded on a desert island, Castaway style (Wilson!). The freelancers who have been the most successful in managing their own bookkeeping are the ones who reach out for help.
I recommend having two financial professionals in your arsenal of support: a tax person and a bookkeeper.
Reach out to your bookkeeper every three to six months to have your bookkeeping file reviewed and checked for errors. This gives you peace of mind that you aren’t screwing everything up, while keeping your bookkeeping cost low.
Collect your bookkeeping questions and do ongoing consultation and training calls with your bookkeeper, too. Over time, your skills will improve and you’ll need less and less support.
The same goes for your tax professional. Every three to six months, have a meeting with your tax person to discuss tax deduction or tax strategy questions.
For years, Maya attempted to manage her bookkeeping herself. While things seemed mostly okay, she knew that there was something off, but couldn’t figure out what. She hired me to do a bookkeeping file review and check for errors.
What I discovered was that Maya was applying payments to invoices that weren’t actually paid! Which meant that she had nearly $2,000 in unpaid invoices that she THOUGHT had been paid.
Luckily, Maya was able to recover payments from all of her clients, and the audit cost less than the unpaid invoices, which meant that she MADE money by hiring outside help.
See? Bookkeeping is WAY cooler than you thought it was. Or, at least cooler than Attack of the Clones. With a little bit of patience, and the right support, you’ll be your very own bookkeeping Jedi. May the force be with you!