There are few things that freelancers and entrepreneurs despise more than managing
their books, but unfortunately, bookkeeping is a non-negotiable part of business. But I DO have
some good news for you: we’re about to jump into a Bookkeeping 101 video to get you started. But
before we do, hit that subscribe button, so you can get more videos like this
to find out all those things like Bookkeeping that you should probbbbably be doing for your business.
Bookkeeping vs Accounting: What’s The Difference?
Think of bookkeeping as an accountability buddy — it tracks your daily income and expenses to
hold you accountable for managing your money. But what’s the difference between this and accounting?
Bookkeeping records financial transactions, whereas accounting analyzes the financial
health of your business. Simply put, one’s administrative, the other’s analytical.
Bookkeeping gives us a clear picture of where our money is going to and coming from,
but there are also three HUGE reasons why you should make bookkeeping a habit.
One: you can Catch Tax Deductions. Two: you can get a Business Loan. And three:
you can catch Financial Mistakes. These three reasons are vital to keeping any
freelancer or entrepreneur’s business alive, so pay attention and you’ll be just fine!
There are two types of bookkeeping systems: Single-entry and Double-entry. The type you
use will depend on the stage of your business. Single-entry records transactions like revenue
and expenses in a single ledger. It’s best for freelancers and sole proprietors in
the early stage of business. A freelance copywriter working from home might have a
bookkeeping system that looks like this: Double-entry tracks where money is coming
from and where it’s going to. Each financial transaction will receive two entries with “debit”
on the left and “credit” on the right, to indicate if money is transferred to or from an account.
This is best for bigger agencies with complex accounts, employees, and multiple inventories. A
marketing agency that just bought a printer might have a bookkeeping system that looks like this:
How Do You Manage Bookkeeping?
Now that we’ve got the basics out of the way, here comes the big question:
Should you do your bookkeeping yourself, or hire a qualified expert to take it
off your plate? Let’s look at the three bookkeeping methods to help you decide.
1. DIY Using Spreadsheets
Do it yourself. If you just launched your business and you don’t have a lot of transactions, we
recommend you to do bookkeeping on spreadsheets. Now… which financial statement should you
prioritize? Your first should be your income statement AKA profit and loss statement.
No matter how much you dislike bookkeeping, you should, at the very least, prepare an
income statement. Let me walk you through how to create a monthly income statement:
Step 1. List your revenue for the month. This can be from new client work or even interest
from your business bank account. Next, calculate the total amount and put it under Total Revenue.
Step 2. Go through the invoices you’ve paid to your contractors and suppliers for the month.
Add them up and list the total amount under Total Cost of Services Sold or COSS for short.
Step 3. Calculate Gross Profit by subtracting COSS from Total Revenue.
Step 4. List your business expenses for the month.
Calculate the total amount and put it under Total Expenses.
Step 5. Calculate Net Profit by subtracting Total Expenses from Gross Profit.
And voila, you just created your first income statement for the month.
Give yourself a pat on the back!
2. Use Bookkeeping Software
As your business grows, you will come to realize that spreadsheets aren’t the best
option when it comes to maintaining your financials. Things like getting an overview
of your financials or an estimation of your tax aren’t possible with just spreadsheets.
At this stage, you will want to invest in a quality bookkeeping software. Take Bench,
for example. Its simple, elegant layout keeps your business finances crystal clear
making bookkeeping feel less intimidating. But just a heads up: Bench is one of the
priciest bookkeeping software in the market as its plan includes an in-house bookkeeper,
but check out our bookkeeping blog post for some cheaper recs, linked in the video description.
3. Outsource Bookkeeping This is the easiest , but
also the priciest, as you’ll have a professional bookkeeper with ongoing support.
Here are some signs of when you’ll know it’s time to hire a bookkeeper on retainer:
1. You need a bank loan to expand business. To get approval from the bank, you’d need
to present all your financials, which can be overwhelming to say the least. Get some help.
2. DIY bookkeeping eats up too much of your time. Is bookkeeping affecting your
productivity? It may be time to delegate. 3. You want to pivot your business. Hire a
bookkeeper to prepare all the necessary statements so you can move forward on optimizing your revenue
with an accountant. They’ll want financials like the balance sheet and cash flow statement.
Now that you’ve mastered the basics of bookkeeping, let’s learn how to
smoothly manage the business side of things without spending a fortune.
1. Keep Personal Finances Separately You want to keep your business and personal
finances apart so you’ll be able to deduct tax. How do you differentiate personal and business
expenses? In a nutshell, if it doesn’t help with your business, it’s a personal expense.
2. Save for Tax Season Freelancers who work from home,
take note. Your low overhead means your deductions are limited… there’s only so
much a laptop and work desk can deduct, so make sure you set aside enough money for tax season.
3. Track Monthly
Don’t leave things to the last minute… This adage certainly rings true in the tax season.
It’s extremely tedious trying to go through 365 days worth of invoices in your inbox.
To avoid this annoying hassle, set a date every month to do your bookkeeping and COMMIT to it.
Alright Sumolings, you are now ready to do some basic bookkeeping! So take a deep breath,
put on some classical music and get to those spreadsheets,
but first-- don’t forget to click that subscribe button so you can
get more videos like this to help you on your entrepreneurial path!