Bookkeeping Basics: Six Tips for Getting Your Finances in Order
Congratulations — you’re living the dream.
You’re doing creative work, whether at your own agency or as a freelancer, and your destiny is totally in your hands. It’s exciting. It’s inspiring. It’s — okay, it’s a little terrifying.
Sure, you’ve got the creative side of things on lock, but what about the pieces of running a business that are distinctly not creative? Taxes, cash flow, bookkeeping? Yikes. It might not be your forte, to put it nicely.
If that’s the case, it’s okay. You don’t need to be a financial whiz to run a creative business — you just have to know one. That’s where we come in. In this chapter, we’ll talk you through all the basics of bookkeeping: where to put your money, how to keep track of what you spend, making sure you get paid, and more.
Because here’s what it comes down to: when your business finances are buttoned up, you have more time and energy for the creative side of your job. It will also keep your business healthy, so you can keep doing what you love for many years to come.
Ready for the six bookkeeping basics that will start you off on the right foot? Here we go.
We’re going to give you tons of actionable tips in this chapter, but we can’t replicate a face-to-face consultation experience. Nothing can replace tailored-to-you expert advice.
As you implement all the best practices included in this book, you should also identify an accountant who can guide you through all the nuances of your country, state, or region’s tax requirements and compliance laws. Depending on where you are, what industry you’re in, and how your business is set up, those nuances include a myriad of different forms, tax rates, and tax break opportunities.
Beyond tax time, an accountant can give you advice on the legal structure of your business and help keep an educated eye on your company’s financial health as the years progress. They can advise you on how much money you should set aside throughout the year for tax time, how to maximize your deductions, and how to build upon these best practices.
Instead of pressuring yourself to learn all those ins and outs, connect with an expert who can make sure you have exactly what you need.
2. Keep your accounts separate
A key bookkeeping best practice is to keep your business and personal finances distinct from each other. Business and personal finances are like orange juice and toothpaste, okay? You just don’t mix them. Trust us on this one.
Business and personal finances are like orange juice and toothpaste, okay? You just don’t mix them.
By keeping your accounts separate, you can:
- Distinguish your business as a true business, rather than a hobby.
- Easily identify deductions at tax time.
- Be prepared in the event of an audit.
- Better understand your business’s operating costs, so you know how to grow and profit.
Start by setting up separate checking accounts, and then stick to the business account for all your business-related expenses. If you’re freelancing, business expenses could be anything from business travel to internet services (if you work from home). If you’re running an agency, business expenses could also include rent for an office, employee wages, and so on.
It’s okay if you’re not completely clear on what will ultimately be a deduction when tax time rolls around. The main thing to avoid is regularly dipping into the wrong pot, like treating yourself to lunch every week with the business’s money, or covering the rent for your office space with your own funds. This type of activity can increase your legal liability, especially if your business is set up as a sole proprietorship — if your business is ever sued, for example, your personal assets could be at risk. What’s more likely is that the tax agency will think your business is just a hobby, and then you won’t be able to claim deductions for any of those business expenses.
If you do accidentally mix up a bit, it’s not the end of the world. Just check in with your accountant about how you should record the transactions in your books, and you’ll still be able to keep the dividing line between business and personal clear.
When you’re just dipping a toe into this side of the business, it can be tempting to use the most basic thing you can find, like Excel or some other desktop spreadsheet. But in reality, spreadsheets get clunky — and fast. It’s far too easy to mess up a formula, move a portion of your data and forget a few cells, or simply get overcomplicated. Then you’re stuck without a clear understanding of your expenses, and no easy way to catch errors, all of which can negatively affect the decisions you make about running and growing your business.
By contrast, the right bookkeeping software may seem a little intimidating, but it can actually set you up for success by allowing you to log your receipts and categorize them electronically. This lets you reduce clutter and increase accuracy in your record-keeping. And when it’s time to hand it all over to your accountant, he or she doesn’t have to sort through paper receipts. Instead, they can look at the electronic records and get right down to the real work of filing your taxes. That saves them tons of time, and you tons of money.
So, find the right software to digitally store all your business receipts.
4. Reconcile everything with your bank statement
Even if you’re doing a bang-up job logging your receipts, it’s still possible that a bill could sneak up on you, an expense could post incorrectly, or some other surprise could appear in your bank account. That’s why it’s important not just to track your expenses, but also to go the extra step of reconciling those records with your bank.
It’s important not just to track your expenses, but also to go the extra step of reconciling those records with your bank.
“Bank rec,” as it’s sometimes called for short, can take a while since it requires going through every transaction you have on the books with the amounts your bank statement shows. But — hurray! — this is where your bookkeeping software can really start pulling its weight. A good bookkeeping software can automatically pull transaction information from your bank account, and reconcile it with your bookkeeping records. It will save you time, while still giving you the information you need to be proactive in managing your cash, spending, and income for your business.
If you’re following all the tips up until this point, then you’re well on your way to buttoned-up business finances. You’ve got a dedicated business account; an accurate, digital record of your expenses; and a reliable process for checking that record against your bank’s information.
Next… it’s time to make sure you get paid.
5. Send invoices on time
This is a big one. Whether you’re a freelancer looking to pay the bills or an agency owner who needs to pay your team and keep the lights on, you need cash to meet your commitments. A big part of making that happen is ensuring you send your invoices on time.
This is a simple business finance concept called “cash flow.” Many new business owners think cash flow just means the amount of revenue they generate, minus their expenses. That’s actually describing your profit — not the flow of cash through your business. Think about it this way: you might have a big check coming in from a client on the 20th of a given month. But what if you have your own bills due on the 15th and don’t have the funds to cover it yet? That’s a cash flow issue.
To keep on top of it, there are all sorts of schedules and projections you can use — but that’s a book for another day. For now, the best thing you can do to keep your cash flow healthy is to make sure you invoice your clients on time. That’s it!
It sounds simple, but too many freelancers and creative types neglect the invoicing portion of dealing with clients. You’d rather (understandably) focus on delivering great work. But if you make sure to also send the invoices for that great work on a regular basis, and diligently follow up with your clients, you’ll ensure a flow of income that’s as steady as the awesome products you’re churning out. We’ll take a closer look at invoices later on in the book, but for now just know that timeliness is absolutely crucial when invoicing your clients.
6. Get in a groove
Once you’ve decided what tools you’ll use, build some maintenance time into your schedule each week. Maybe every Wednesday afternoon, you scan and digitally record your receipts in your bookkeeping software system. Maybe every Friday, you sit down to review your cashbook and the status of your invoices.
However you choose to set it up, keeping a regular eye on things will help you spot issues before they become bigger than you can handle. You can nudge a client to pay their invoice before your bank account is dangerously low. You can push a business purchase off until next month when you see how much you’ve already spent. You can make all manner of decisions to protect the health of your business, and keep it healthy for the future.
Remember that making time for these bookkeeping best practices will save you time in the long run: less time adding up receipts, less time chasing invoices, less time juggling cash flow. And you know what that means — more time to unleash your creativity, and do the work you really love.
There’s your six tip toolkit to start bookkeeping off on the right foot. With the right tools, it doesn’t need to be nearly the headache you expected. From the first step of finding a local expert who can help you, to the last step of running it all like clockwork, your business is sure to benefit from these best practices.