Simplify Your Bookkeeping

Thursday Bram |
Business & Finance
| May 19th 2010

When keeping your books is hard, it doesn’t get done. When you’ve got lots of work on your plate, your bookkeeping doesn’t get done. If you have anything more appealing to do, your bookkeeping doesn’t get done. Many freelancers struggle with keeping their records up to date, whether it’s because the task itself is difficult or we have better uses for our time. Anything we can do to simplify the process means that we won’t be stressing out over our books when tax time comes around, when there’s a lost invoice, or when anything else goes wrong with our financial records.

Standard Bookkeeping Software Is Not The Answer

There are plenty of tools out there for keeping books, but many of them are actually overkill when you’re operating as a freelancer. Most are built with a certain size of business in mind — a few employees, some inventory and other factors that just aren’t part of a freelancer’s life.

“It’s easy to point out double entry accounting (you know, journal entries, debits and credits) as the first scapegoat, but to me, the real overkill starts immediately with what’s traditionally know as a ‘chart of accounts.’ People understand the notion of real-world bank accounts, but most bookkeeping software treats the income and expenses tracked as ‘accounts’ – what could be more confusing, before you even get started? The vast majority of freelancers are self-employed; they file a Schedule C with their tax returns. All the IRS really needs to know at the end of the year is how much you earned and in what general categories you spent money for your business,” says Kevin Reeth. Reeth is the co-founder of Outright, a bookkeeping web application dedicated to making handling the paperwork easier for freelancers and small businesses. (Editor Note: Outright is a current advertising partner on FreelanceSwitch.)

“The other area that is complete overkill is the whole notion of depreciation. Depreciation is used to write off the cost of an item that has a useful life of more than one year. You spread the cost out over multiple years – for example, computers and office equipment should be depreciated over 5 years. But there’s a nice little exception in the tax code that makes this unnecessary for most freelancers. It’s called Section 179 and it lets you write off the full cost of up to $125,000 in equipment and such in the year in which you start using it for your business. In 2008 and 2009, that limit was $250,000. I don’t know about you, but I haven’t met many (any) freelancers who spend that much each year on equipment,” continues Reeth.

Most freelancers don’t have the time to spare on trying to figure out accounts and depreciation. The amount of time you can save by avoiding the question entirely is phenomenal. It doesn’t hurt that many of the simpler tools available for bookkeeping are less expensive that the full-fledged software packages that are considered a ‘must-have’ for small business owners of every type. Some, like Outright, are even free to use.

Simplicity Saves Money

The easier the bookkeeping system you adopt, the better the financial results. I’ve set up my bookkeeping tools so that I need to spend a maximum of five minutes a day on recording new income and expenses, with an extra hour at the beginning of the month so I can get reoccurring invoices out. More time than that would cut into the work that I do for paying clients.

Reeth points out that the idea that a more basic system may seem counter-intuitive: “This may seem counter-intuitive; as though a more comprehensive system makes it possible to record more deductions by getting things just right. But here’s the problem – if a system is too hard to use, people just don’t use it. The majority of very small business owners use no accounting software at all. What good is a comprehensive solution if most people can’t use it? You want to spend your time servicing clients, building your customer base, and getting the lifestyle you want – not wrestling with some financial software package.”

For freelancers, most of our deductions don’t require too much in the way of extra paperwork. The most complex can be the home office deduction and even that just requires a worksheet so that you can calculate a number to add to your Schedule C. You can also save on the money you might be handing to your CPA or tax preparer. If your financial records aren’t organized and easy to work with, Reeth points out that you’re effectively paying your tax preparer to do data entry. If your system is simple enough that all your records actually make it into the computer, your tax preparer can work significantly faster next spring.

It’s Not Just Software

Your whole system of handling money can contribute to automating your bookkeeping. Using a separate checking account or credit card from your personal account is one of the biggest time-savers. Reeth notes, “…Get a separate checking account (or even a PayPal account) through which to move your business money. Choose an instutition that doesn’t charge a lot of fees, has great online banking, including online bill payments, and has lots of ATMs where you can deposit your checks. If you can also get a credit card to use specifically for business expenditures, that will help too. The goal is to be able to just run your business and have the bookkeeping as automated as possible. Clean, separate, easy-to-access transaction history is a great starting point.”