Posted 01.14.2015

Accounting for Freelancers (Part 2)

Tomorrow estimated taxes are due, so I thought it would be an opportune time to bring up accounting for freelancers. I wrote Part 1 a while back. There, I focused on the items that you need to keep track of for your annual reporting. In this post, I want to focus on the part of accounting that helps keep your business afloat: business opportunities, cash flow, etc.

As before, I have a spreadsheet (separate, though) that keeps track of all this information.


NOTE

You can access my Google Spreadsheet here.

Any cells with a yellow background have formulas already set to calculate that value. —In other words, don’t edit!

If you have a Google account, you can go to File > Make a Copy and it will save a version that you can edit in your Google Drive.


Opportunities

In the “Opportunities” tab, I keep track of all the proposals that I’ve submitted and how much they’re worth. This gives me an idea of prospective projects and potential revenue sources. Once a project has been approved or rejected, I’ll remove the line item. When this sheet starts to get short, I know it’s time to put out feelers for additional work in order to maintain a healthy cash flow.



Work in Process

In the “Work in Progress” tab, I account for all the projects that have been approved. This sheet helps me start to think about projections. If I don’t take on another project and just finished the work that I’ve already agreed to do, I would make X.



Aging Summary

This tab keeps track of all the invoices that I’ve sent out. Then, when an invoice comes in, I’ll remove the line item. It also serves as a good reminder for any invoices that I need to follow up on.



Cash Flow, Profit and Loss, and Balance Sheet

In my mind, these 3 sheets are the hardest to understand. — and if I’m honest, I don’t do a good job of keeping these up to date.

There’s a lot of repeat information between these 3 sheets. They present a lot of the same data, just in a different format.


Cash Flow

As the name suggests, this document shows how cash flows through your company. It shows the amount you currently have, the amount you’ve received, and the amount going out. Out of the 3, this is my favorite, because it helps you see how long your company can go without any additional income.


Profit and Loss

This statement shows your overall profit and loss from month to month. Dumb answer? Keep reading.


What’s the difference between the two?

The Cash Flow document is a prediction that you can use to forecast your business while the Profit and Loss document is based on actual.

It seems like the two should be the same, but they’re not. A company can be profitable and still go bankrupt from cash flow problems. How so? If a company has to pay for materials in January, but they don’t get payments from their customers until June, they have to do something to survive January to June.

The reverse it also true. A company can have great cash flow but not be profitable. Amazon raised a ton of money selling stock in the mid-1990s. So much so that they had close to $2 Billion in the bank! But, every year, they spent more money than they made. Their yearly profit was negative, but they were able to tap into their savings account to make up the difference.

NOTE

This article helped explain it to me. I kindly borrowed their examples.


If you take our new found knowledge and compare the two spreadsheets again, you’ll see that the Cash Flow document takes your opening cash into consideration, while the Profit and Loss document does not. It simply adds up each month’s “profit and loss.”


Balance Sheet

The balance sheet helps determine the total value for the business because it also includes a business’s liabilities, assets, and equities. Items are listed in the order of liquidity: cash, short term investments, accounts receivable, etc. (Reference)


To sum it up:

  • Cash Flow shows a company’s cash activities.
  • Profit and Loss shows how the assets are being used.
  • Balance Sheet shows the book value for a company.


Budget

This sheet keeps track of my budget. I have all my vendors and known bills marked on the left and the amounts on the right. Granted, it doesn’t take tax into consideration, but it does tell me how much I need to make each month in order to cover my expenses.



Quick Tips and Tricks


Use Software

I’ve always used a spreadsheet to track everything. I understand my spreadsheets. Things seem simpler this way. But, as I confessed, I don’t always do a good job of maintaining my profit and loss, balance sheet, and cash flow documents. So, I’ve started moving all of my expenses into FreeAgent. So far, it’s been great because it runs all those reports for you. You don’t necessarily have to go with FreeAgent, there are plenty of options out there. Quickbooks, Fresh Books, and Less Accounting seem to be the other 3 front runners. I went with FreeAgent because it seems to be the easiest for me to understand (plus they target creative agencies).


Accept payments online

I’m a little late to the game on this one. I’ve drug my feet and asked clients to be old fashioned: send checks. Most online gateway companies take 2.9% of your bottom line and I’d prefer to keep it to myself if I can help it.

I was talking to a fellow business owner and he shrugged it off, “I chalk it up to the cost of doing business.”

As an experiment, I offered the option to the client to pay online. As soon as the email hit my inbox saying, “The payment is complete. The money will be in your bank account shortly.” I was hooked! I didn’t have to wait for the check. I didn’t have to go to the Post Office. I didn’t have run by the bank. Count me in!


Set up automatic reminders

Even though I have the “Aging Summary” document, checking it and sending reminders to clients required extra work on my part.

I’ve dubbed 2015, the year of systems. Why do that, even simple work, when I can automate the process?

With FreeAgent, I can simply set up reminders to send to the client every couple of weeks. It’s been great. I don’t have to worry about it, plus I’ve gotten paid faster.



Do you have any tips and tricks that you’ve found in accounting?