Continental Currency note from 1778, designed by Francis Hopkinson. Public domain image courtesy of the U.S. Diplomacy Center exhibition page.

Like many things we know are good for us—exercise, getting a good night’s sleep, laying off the French fries—keeping careful track of finances when you’re self-employed is one of those must-do tasks to stay healthy in the money department. Nevertheless, a huge number of well-meaning folks neglect their numbers, and their bank accounts pay the price.

I tend to see two main types of financial blow-off:

  1. Fully neglecting to track income and expenses by letting receipts pile up (or get lost) and failing to enter data into a bookkeeping system.
  2. Doing a decent job of keeping income and expense records up to date, but failing to use the numbers to answer questions about the overall financial situation.

While I’ve definitely known more than a few self-employed creatives guilty of the abject neglect described in item 1 (you know who you are), the second type of financial ignorance is practically an epidemic among freelancers and microbusiness owners. Over and over I hear the sheepish confession, “I don’t do enough with the numbers.” If you merely keep up with the basics, you might avoid true financial disaster. But you’ll definitely miss opportunities to thrive if you don’t use your data to make strategic decisions.

Getting Over the Hump

If you’ve had your head in the sand about your finances from self-employment, take heart: You are not alone (by a long shot). Tons—tons—of successful people loathe dealing with numbers. They regard financial management with fear, anxiety, insecurity or some combination of the above. Typically, they say they are simply too busy with other pressing tasks to deal with tracking income and expenses or analyzing the numbers.

The good news is that affordable bookkeeping software streamlines most of the work, from tracking expense categories to generating sophisticated financial reports, putting essential financial information at your fingertips. If you really hate working with numbers or truly don’t have the time to do so, have a competent bookkeeper do the job.

However, as the head of your self-employed empire and the person responsible for guiding your own destiny, you do need to be in the know about your self-employed finances. So if you hire someone to do most of the financial management tasks, make sure you’re in the loop and that you understand what the numbers mean. Don’t be shy about asking for guidance or mentoring from an accountant or bookkeeper. If you feel insecure about your level of financial knowledge, you’re in good company. Just make a sustained effort to learn as you go.

Financial Management in a Nutshell

The trick with bookkeeping is to establish a system early to help you stay organized. By “system” I mean a simple process for organizing your receipts and files, as well as having bookkeeping software set up and configured. With a system in place, you’ll definitely be able to handle most or all of your bookkeeping tasks, even if you’ve never done them before. I typically break financial management down into three broad steps.

1. Keeping and organizing records of expenses and income: Financial management starts with keeping records of all the money your freelance venture spends (expenses) and all the money it earns (income). This means carefully keeping and organizing your receipts and expense records (such as bills from the office supply store, invoices from your web-hosting company, and receipts of payments to your freelancers) and your income receipts (such as receipts from sales of paintings, check stubs from checks paid to your band, or your invoices to your graphic design clients marked “Paid”).

2. Entering this information into bookkeeping software: On some periodic basis—maybe monthly for a small graphic design business and daily for a busy café—you’ll enter the information from your income and expense receipts into a bookkeeping system. More often than not, this will be some sort of financial management software such as Sage accounting or QuickBooks.

3. Generating financial reports: Finally, with up-to-date information entered into your bookkeeping system, you’ll generate reports such as a profit/loss report or cash-flow projection to reveal your overall financial health.

Doesn’t sound too bad, does it? Again, setting up a system will make a huge difference when it comes to entering and categorizing data in your bookkeeping software. With your data entered, you’ll be all set to do the important (and actually quite satisfying) part of financial management: generating reports showing you the financial health (or illness) of your venture.

Often, business owners have such poor systems in place they barely manage to get their data entered accurately. It becomes a grueling task—hours spent searching for receipts and trying to decipher poorly documented expense reports—that they stop after the data entry stage and never get around to generating reports. Don’t let this happen to you. Generating reports is key to managing your self-employed finances and making strategic decisions.

Financial reports summarize the data in your bookkeeping system to show you different aspects of your financial situation. For example, a profit and loss report compares monthly income to monthly expenses to show whether you are selling enough products or services to cover costs each month. A cash-flow projection shows similar information, but includes other sources of income such as cash investments from owners or loans (that is, not just revenue from sales). It also organizes the information slightly differently to show you whether the timing of your income is adequate to pay your bills on time.

The Payoff

By generating reports, you’ll be able to see trends and patterns in your finances and identify profitable opportunities to pursue. You’ll also avoid letting your business simply drift along—or worse, run it into the ground. Here are a just few ways that analyzing your financial reports will help you stay profitable in self-employment:

  • You’ll be able to price your products and services more competitively, pace growth more effectively and trim costs strategically—for example, you might cut back on art supplies or outsourced services like printing that aren’t helping to generate sufficient income.
  • You may be able to reduce taxes by timing your purchases strategically and claiming all your deductible expenses. Disorganized freelancers often miss these opportunities.
  • You’ll be able to manage your cash flow, ensuring you can pay important bills on time.

Finally, if you’re itching to take the leap into self-employment and still worried that you have too much to learn in a short time, stop fretting. You don’t need to turn into a financial whiz overnight. In practice, I advise every freelancer and microbusiness owner to consult at least once or twice during their startup days with an experienced bookkeeper or accountant (or possibly both) to help get started on the right foot. For those of you who feel like total novices when it comes to the money stuff, consulting a professional will help you get over the hump of your financial learning curve. There are also lots of useful organizations such as The Association of Women’s Business Centers and SCORE that can help get you up to speed.

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