So you’re a freelancer, contractor, sole proprietor or, the common catch all, a solopreneur. Congratulations! This undoubtedly means you’re hard-working, passionate, smart–and you love being your own boss. There are few accomplishments as rewarding as running your own small business. (And that includes both the ups and the downs!)
However, it’s pretty unlikely that you’re an accountant. You might not have much experience in managing the financial side of things, but this we can guarantee: a solopreneur without at least a decent understanding of accounting is on the path to nowhere good. Let’s get educated so you stay out of the accounting doghouse…
Separate Business and Personal Expenses
As an employee, it was fine to have your paycheck deposited into your personal account, but that won’t fly as a business owner. The last thing you want to do is take revenue into the business and dump it straight into your personal accounts. You need separate personal and business bank accounts to better track expenses and income. Moreover, having a business bank account will make filing your taxes far easier and will help you get better tax breaks, too. Also consider applying for a business credit card for business related purchases.
Stay on Top of Invoicing
Invoices ultimately lead to income, so business owners rarely forget to invoice. (For the average solopreneur, invoicing is one of the best parts of the job!) But just sending the invoice isn’t enough. You also need to track payments received for month-, quarter- and year-end reporting. When you send a client an invoice, you’ve created what accountants call a “receivable.” Having a system in place to track your receivables helps prevent a major headache at tax time–but even more importantly, it allows you to make sure clients are paying invoices on time. (Bet you had a hunch that Kashoo is great for invoice management.)
Any time you spend money on your business—whether it’s taking a potential client to lunch, buying printer ink, or paying rent on your office space—you need to track it. Having a separate business banking account and credit card can help make this easier, of course, but you still need to keep your receipts. Luckily, you no longer need to stuff paper receipts in a shoebox—your smartphone can handle it. (Learn more about Kashoo’s mobile apps on the iPhone, iPad and Android that make expense capture literally a snap.)
Record Deposits Correctly
Launching a business often requires infusions of capital from sources other than income from the business. If you’re supplementing your company with savings or a loan, you need to be sure you’re recording the source of that deposit correctly in your accounting to avoid paying income taxes on deposits that aren’t, well, income. Bottom line: get smart about your chart of accounts! (Learn more about chart of accounts basics.)
Set Aside Money For Taxes
As an employee with a regular paycheck, you probably only thought about taxes once a year. Unfortunately, as a solopreneur you don’t have that luxury. Don’t fall into the trap of thinking that a paid invoice is 100 percent income for you and your business and spend accordingly–it’s critical to remember that roughly a third of that invoice will have to go to paying taxes. Be sure to budget accordingly. Also, be aware of any quarterly tax filings and payments that might apply to your solopreneurship. (Note: “a third” is a rough rule of thumb and this figure will vary by jurisdiction, business type, etc.)
While these five pointers are hopefully helpful, they are just the tip of the iceberg when it comes to being an accounting-savvy solopreneur. Check out Kashoo U for more!