Creating a freelance bookkeeping system (in five easy steps)
Whether you’re an experienced freelancer or just starting out, it’s important to keep on top of your business finances - and having a great bookkeeping system is the first step.
In this guide, the experts at FreeAgent reveal how to get a handle on your freelance bookkeeping in five easy steps.
1. Understand your current situation
Firstly, you’ll need to review your current bookkeeping system (or lack thereof), so take some time to think about the following:
- How often do you keep track of what’s coming into your business and what’s going out of it? Can you easily understand what you’ve earned and what’s been spent?
- How do you store a record of your financial transactions? Do you use a paper filing system, a spreadsheet or a cloud bookkeeping software?
- Is the amount in your bank account the same as what your books say should be there?
- Can you easily find any information you need? How long does it take you?
- Do you use an accountant or bookkeeper, or manage your finances solo?
- Do you keep an accurate record of invoices and out-of-pocket expenses?
2. Identify the key components
A great bookkeeping system should be secure, well organised and (most importantly) easy for you to use!
Ideally, you’ll never have to input the same information more than once. This is where electronic options, such as software, have an edge over pen-and-paper bookkeeping.
Accounting software also has the added advantage of making everything easier to find, as information is far less likely to go missing than bits of paper!
If you go down the spreadsheet route then be sure to back up your records regularly (a secure cloud database such as Google Drive will do the trick), as you don’t want to lose everything if your laptop crashes!
You can put as much information as you like into your bookkeeping system, but the key pieces you’ll need as a minimum are:
- The dates of any invoice, bills or expenses
- The dates you made or received payments for these invoices, bills or expenses
- The name of the person or business that you paid or received payment from
- A description of the product or service that you paid or received payment from
- The amount you paid or received in payment
A great bookkeeping system should also make the most valuable information accessible. There are a number of ways to do this, but you’ll want to be able to easily get an overview of how much money is coming into your business (as well as where you’re spending the most).
3. Organise your documents
There are so many documents involved in managing a freelance business that it can often be difficult to keep track of them all. However, it’s important to keep your paperwork organised in case you need to refer to it at a later date.
Whether you’re sticking to a paper filing system or storing your documents digitally (or both!), we recommend keeping hold of all your invoices, bills, receipts for expenses and bank statements, as well as any tax documents or correspondence from HMRC.
It’s important to note that there is occasionally a legal requirement to keep hold of paper copies of some documents - so be sure to check before shredding anything!
Storing digitally comes with the advantage of making it easier to search for documents (we recommend using a unique reference for each document), but it’s important to note that there is occasionally a legal requirement to keep hold of paper copies of some documents - so be sure to check before shredding anything!
Whether physical or digital, we recommend storing your financial records in a yearly folder that’s divided into subfolders for each category of the document (i.e. bills, invoices, bank statements). If you’re feeling particularly organised, you can even add a layer of categorisation that shows you record for each quarter or segmented by the client.
Once you’ve got your files in order you’ll need to keep them that way, which is where your bookkeeping routine comes in.
4. Develop a bookkeeping routine
When it comes to managing your finances, even the best system in the world isn’t much use if you don’t take the time to regularly update your books.
Updating your books in small, manageable chunks tends to be more accurate than trying to do it all at once on a less regular basis, so you’ll be less likely to make an error when filing important documents like your tax return.
As a result, we recommend building an hour or so for bookkeeping into your weekly routine to help you stay on top of your accounts and avoid tax headaches!
During this hour, you should document:
- any invoices you’ve sent to customers
- bills you’ve paid to suppliers
- business expenses incurred
We also recommend using this time to check the profitability of any projects your working on and look at how your cash flow is doing. This should help you understand where you’re making (or losing) money and give you a better long-term view of how your business is doing.
5. Keep going!
The secret to keeping your business finances in order is to regularly maintain your books, so be sure to keep going and don’t beat yourself up if you miss a week or fall behind!
Once you’ve built your bookkeeping system and got into the habit of updating it regularly, you’ll really begin to feel the benefits. Your accountant will also thank you, as they won’t have to spend their time trying to piece together your finances and instead will be able to focus on giving you the right advice.
More on freelancer accounts and managing your finances.