Before I went freelance, the thought of having to manage my own accounts and file my own tax return was pretty daunting. If you’ve never been self-employed before, it can seem like a scary prospect. But dealing with your freelance finances isn’t actually that difficult, as long as you’re organised.
I want to start off with a little disclaimer: obviously I am in no way qualified to dish out financial advice, so I’d recommend reading up on HMRC’s guidelines (or the relevant authority in your country) and seeking advice from a professional accountant if you need it. These are just some of the things I’ve learnt from managing my own accounts, and some tips that have helped me keep my freelance finances in order.
Register as self-employed
As soon as you start taking on freelance work, register yourself as self-employed (even if you’re still working a regular full or part time job). If you’re a freelancer, you’ll be classed as a sole trader and you need to notify HMRC of this as soon as possible. This means you’ll be responsible for keeping a record of your accounts and sending in a self-assessment tax return every year so you pay the right amount of tax. The whole process can be done online and it’s pretty simple. The HMRC website has lots of useful information to guide you through the process.
Choose your method of accounting
There are two main methods of accounting which you could use for freelance finances: cash based accounting and accrual based accounting. Basically, with cash accounting you record income when you actually get paid, but with accrual accounting your record income when it is earned. For example, you might do a project in June, send the invoice at the start of July and get paid in August. With cash accounting, you’d record the income in August, but with accrual you’d record it in June.
Personally, I find cash accounting a much simpler system and it’s easier for me to keep track of cash flow and work out which payments I’m still waiting on. Accrual accounting is better if you have large regular expenses (such as office/warehouse rent and employee salaries) or you’re a business with an inventory of actual physical products to sell, but for the majority of freelancers I’d say cash based accounting is probably the best option. Whichever one you choose, stick to it so your accounts are consistent and you don’t end up recording income twice.
Create an invoice template
Did you know there are certain legal requirements for what must be included on your invoices? According to HMRC, you must include:
- a unique identification number
- your company name, address and contact information
- the company name and address of the customer you’re invoicing
- a clear description of what you’re charging for
- the date the goods or service were provided (supply date)
- the date of the invoice
- the amount(s) being charged
- VAT amount if applicable
- the total amount owed
Create a template which includes all the information above. It doesn’t have to be super fancy (I just do mine on Word so they’re easy to edit), but I’d recommend including your logo or branding to make them recognisable for clients. Don’t forget to include payment terms e.g. whether you’d prefer to be paid by BACS or Paypal, and how many days the client has to pay the invoice. Here’s a basic version of my invoice template which you can download and customise for your business.
Set up lots of spreadsheets
When it comes to keeping track of my freelance finances, I find it’s best to keep it as simple as possible. There’s no point in overcomplicating things and using all the fancy big business balance sheets and cash flow statements if you don’t need them.
Instead, I have two spreadsheets for each financial year. The first one is my main accounts. In an Excel document, I’ll create a front sheet with an overview of the year, and then 12 more sheets with a detailed breakdown of each month. The front sheet is great for keeping an eye on how your overall earnings are increasing or decreasing, and each detailed page shows all the exact transactions. I record income in one column, expenses in another, and then calculate the total each month. This is the taxable income which you’ll have to notify HMRC of in your self-assessment form. As I mentioned above, I use cash based accounting so I record income on the date I got paid, and expenses on the day I spent money. You can download my accounts template here.
Along with this, I also keep another spreadsheet with details of all the invoices I’ve sent. I include the invoice number, who it was sent to, the amount it was for, the date it was sent, and the date payment was received. This is a really easy way to keep track of your invoices and see who you need to chase up for payment.
Record your income and expenses
There’s no use in having a spreadsheet set up if you don’t actually use it! I find it easiest to record things as they come in. If I check my bank account and see that I’ve been paid, I’ll just open my accounts spreadsheet and note it down immediately. I prefer organising my freelance finances this way as it means I don’t have to sit down at the end of every month and scroll through emails and bank statements to work out what I need to record. Other people prefer to do it once a week (for example, set aside an hour every Wednesday afternoon to catch up on your accounts), whilst leaving it until the end of the month works best for some people. Work out what’s best for you – I know not everyone will be up for daily accounting!
It’s also important to know what you can claim expenses for. Some expenses are pretty obvious – such as business stationery, travel costs and equipment for running your business – but there are also ones you might not have thought about. If you work from home, you can claim part of your electricity, gas, council tax, internet and phone bills as a business expense. You can either work it out directly, or use simplified expenses to work out a general total for these kinds of expenses. I use simplified expenses as working it out each month is too time consuming and complicated – but if you’re looking to make the most of claiming back expenses, it might be worth working it out or speaking to an accountant who can do that sort of thing for you.
Create a filing system
I hardly ever have paper invoices or receipts, so my filing system is entirely on my computer (backed up, of course!). I have a folder called Accounts, then a folder within that for each tax year. Then within that, I have a folder for Invoices, Expenses, and Timesheets. Inside each of those is another folder with the every month. Sounds complicated, but it’s not! Then, for example, if I need to look up an invoice I sent in June 2016, I can easily find it without having to dig through lots of files or paperwork.
I don’t have many expenses, and the ones I do have are almost all online (things like Hootsuite, Adobe Creative Cloud and Dropbox subscriptions). I get emailed a receipt each time I pay for one of these services, so I just save a copy to my Expenses folder (again, organised by month). On the rare occasion I have a paper receipt, I’ll scan a copy and put it in the correct Expenses folder so I don’t need to worry if I lose the original version. If you have a lot of expenses and paper receipts, it might be worth using an app like Foreceipt to record and store everything.
Save money for your tax return
As you don’t have to pay tax at the end of every month, it can be tempting just to spend, spend, spend all your earnings. But don’t forget, once you submit your tax return, you’re going to have to pay all the tax you owe. It’s a good idea to work out a general idea of how much you’ll owe so you can put this money aside. For example, if you expect to earn around £2,000 every month, you’ll have to pay approximately £366 tax per month, which works out at £4,400 per year. Rather than scraping together every last penny to pay the £4.5k at the end of the year, pop the £366 in separate bank account each month so it will be ready and waiting for you when your tax bill arrives – anything left over can be your yearly bonus! I actually save my tax money by investing in Premium Bonds as (unlike a high interest savings account) you can withdraw your money any time with no penalty, plus you have the chance of winning tax-free cash prizes every month. I’m still holding out for the million pound prize though…
Don’t forget to check the important tax return dates, too. Each tax year runs from April to April, and you have to return your paper self-assessment tax return by the end of October (end of January if you do it online). Your final tax bill is then due by midnight on January 31st. It can get a little confusing as you’re essentially working a year behind (for the tax year ending in April 2017, you don’t have to pay your tax bill until January 2018), but HMRC have plenty of guidance on their website.
DIY vs accountant vs software
When I first started freelancing, I couldn’t decide whether I needed to hire an accountant, or pay for accounting software, or just do things myself. I went for the last option, and I think it has worked out well for me. I’m by no means an accounting expert, but as long as I keep things organised and simple, I find it reasonably easy to keep track of everything. I’m also lucky because I have pretty simple accounts to manage – I only have a handful of invoices each month, most of which are regular clients, and I don’t have many expenses. I also don’t have to worry about paying employees or hiring office space or anything like that.
If you have a slightly more complicated setup, or you don’t feel confident going it alone, it might be worth hunting out a local accountant who can help you keep on top of things – even if it’s just an initial consultation to get you set up so you can do it yourself going forward. I’ve also heard great things about software like FreeAgent and QuickBooks, and they’re definitely something I’d consider if my business diversified or expanded and I could no longer keep up with my basic (but functional!) spreadsheet system.
I hope you’ve found this ginormous post helpful – if you have any questions feel free to leave a comment and I’ll do my best to answer! Have you got any tips about how to organise and manage your freelance finances and accounts?