The Joy of Accounting
09 May 13
A little while back I mentioned on Twitter that I was psyched about doing my accounts and kind of jokingly said I might do a blog post on it (because it's not the most thrilling topic and I didn't think anyone would care). Surprisingly I received some enthusiastic feedback from other freelancers so I thought you know what, I can make accounting thrilling, goddamn it! So this is me, trying.
I am loath to admit that I don't enjoy working with numbers because its such an ~artist~ cliche (as well as a dumb gender stereotype). Alas, we can't be good at everything. I have to work really hard to keep my financial shit together and it doesn't come naturally to me, but for that very reason I get immense satisfaction from doing it for myself. In this post I'm going to tell you what I do, because I really could have done with reading something like this last year when I was reading Accounts Demystified: The Astonishingly Simple Guide to Accounting and tearing my hair out when they still appeared very mystifying indeed.
Note: my basic knowledge of accounting is based on my working in the UK as a sole trader. The rules and laws in other countries may be different and accounting for a Limited Company is also more complex.
Why you should give a shit about accounting and book-keeping
It's not cute to misunderstand the basics of accounting. If you're a self-employed woman in your twenties working in the arts or fashion, there are more than enough opportunities for financial institutions to treat you like you're a moron, trust me. There's no need to make their job easier by not actually knowing what's up. It's a major part of running any business no matter how creative and your creative decisions are (or should!) be informed by your financial position. Keeping track of your income and outgoings allows you to see what's working and where you should concentrate your efforts or which part of your business is costing a lot of money for fewer rewards. It allows you to plan for the future by setting money aside each month (what's up late-paying clients), get on top of outstanding invoices owed to you and know how much you will need to pay out to creditors in the future. And of course, taxes. Waiting until the day before the tax deadline to know how much tax you'll have to pay is not the way to go.
Lots of ~business gurus~ suggest outsourcing everything to other people so you can concentrate on "being creative", but those people are douchebags because getting a handle on your finances is super important in allowing you to be creative. When it comes to finances, there is nothing worse than the unknown and stress over your bank balance can put tremendous pressure on your creativity and ability to work. The good news is that knowing your way around your books isn't hard and doesn't take much time because it's 2013 and there is awesome technology to help us.
When you start freelancing or working for yourself, you probably start small. Usually a few jobs come in here and there, you might still have a day job that pays the bills and the extra income doesn't feel like a Real Business yet. You probably know that you should have separate bank accounts - I definitely did - but it didn't stop me from doing foolish things like using the two accounts interchangeably because I couldn't be bothered to do a money transfer. That is a terrible idea, don't do it. If you are working for yourself in any capacity and haven't done so already, stop right now and separate your personal and business banks. This will make doing your taxes a whole lot less confusing. Get a business bank account with a debit card, a business savings account (because your money shouldn't be sitting in a current account anyway) and a separate PayPal account if you use one. Do not mix your business spending and your personal spending ever because it's easy to do, but very annoying to undo (if you really want to know, buying non-business things on a business account is less annoying than vice versa, but really, don't do either).
My income currently comes from several areas of work: freelance illustration, photography and selling prints in my shop. I have a business current account and a business savings account, as well as a separate Paypal I use for my shop. For the first couple of years, I made all my invoices by hand, vaguely kept track of income and expenses in spreadsheets that I never really updated, kept my receipts dumped in a drawer and spent days (inevitably just before the deadline) stressing out and crying about my tax return. After two years of this and overpaying taxes because I wasn't even taking advantage of all the write-offs, I had had enough. Last autumn I set up a system and have stuck with it since.
"You should just get an accountant"
When you first begin thinking about taxes, you might seek advice from friends and family or the internets. The advice will probably be to "Just find an accountant and get them do it". I call this "The Box of Receipts Approach". Taking a box of receipts and a file of invoices to your accountant annually is super common, but I would be wary for the following reasons:
- Dude, do you know how much that stuff costs!? Are you made of money? Sure some or even all of it might be tax deductible, but there are way more fun things to deduct than accounting costs. You could get a new iMac for the price of a year's book-keeping. Which would you prefer?
- You are responsible for your taxes, even if a tax advisor submits your tax return for you. If something is wrong, it's on you. If they do it all for you, are you going to understand any of it? What about if you get audited (it's good to operate under the assumption that you're going to get audited), how much are you going to pay your tax advisor to do everything on your behalf when you have no idea what's going on? What about if you get audited 5 years down the line, what shape are your records going to be in then?
- You're made to believe that you need an accountant to do everything for you because it's too complicated (it's not), too hard (it's not), too time consuming (it's not), not worth your time (it is!) either by accountants who need your business or people who aren't doing it themselves for the above reasons and thus have no idea what they're talking about ANYWAY.
The box of receipts method gets the taxes done and you might even get a basic profit/loss report out of it too, but if you're only doing it once a year it just doesn't give you all the info on your business when you need it - right now, daily. It doesn't give you the same level of smug satisfaction either, let's be real.
I do have a very nice and very helpful accountant (who I hope never sees this, lol). After spending my first few days getting to grips with FreeAgent as outlined below, explaining as many transactions as I could and leaving anything I wasn't sure about, I made an appointment with a small firm who specialise in working with online accounting software. I wrote a list of questions to ask (mostly CAN I CLAIM THIS, WHAT ABOUT THIS?), we spent two hours going over everything I wasn't sure about, I left with a list of things to do and lots of handy tips. Once that was done, my accountant could log in to my FreeAgent and check over everything, fill in my tax return and submit it to HMRC. This cost me £300 all in and it was money well spent to have someone check everything over and verify that I was doing it right. I'm going to file my tax return for 2012/2013 next month and I won't even have to see him in person this time, because it's all ready to do online.
I'm not saying that you shouldn't seek professional help when necessary, just that you should know what you're doing when you get there. The more work you do yourself, the less they'll need to bill you for.
So here's what I do
I use FreeAgent as the hub of all my accounting activities (that's a referral link, if you sign up we both get 10% off). I previously tried Xero, which works great for my bf, but I never got on with it. I found Xero too stark and complicated, though they really do the same thing, so it's worth trying out several options before committing. Most services have a free trial period so you can test the waters. Some other options you might want to investigate are FreshBooks, KashFlow and ClearBooks.
As I go about my daily business, I save every invoice, receipt and bit of paper that relates to my work (it's now pretty much crossed over to my personal expenditure too and I've just got in the habit of scanning everything no matter how unnecessary). When I empty my wallet or get something in the post, I stick it all in a folder on my desk which acts as an inbox.
Once a month I go through the folder and scan everything and file it away physically and digitally.
The physical papers are put in folders/binders/boxes depending on what they are (I have a folder for each bank account statements, separate boxes for expense receipts by year and so on).
The digital copies get imported in to an Evernote "inbox" notebook and I organise them there. I set the "date created" of each note as the date on the receipt which allows me to sort them chronologically if I need to find something in the future. I tag it with what it is (receipt:travel), the payment kind (payment:Paypal) and any project it relates to, if relevant (project:LFW AW13). Once everything in the Evernote inbox is tagged and dated, I move it to Evernote folders separated by financial year.
tip: Make sure that you scan to PDF, as Evernote will then make all the text searchable. Between that, the tags and the dates, you'll never lose a receipt again. Some printed receipts actually fade away completely within a year, so get them scanned while you can still read them!
Once the receipts are sorted, I import my latest bank statement in to FreeAgent (this literally just means logging in to my bank and exporting a statement as a .QIF and uploading it to FreeAgent. Depending on your bank and software, this step might be done automatically, as Paypal is) and go through each transaction and "explain" it. For example a transaction that shows like this:
02 May 13 INT'L LINODE.COM 40.58
is the hosting for this blog. It's an outgoing and a business expense, so I would select Money Out > Admin Expenses > Web Hosting from the drop down menus. I pull up the relevant receipt and attach it to the explanation and I can move on to the next one! Most of my explanations are either business expenses or payments to my personal account, which are filed as Money Paid to User. Anything that is an equipment purchase over £100 is classified as a Purchase of a Capital Asset. It's pretty simple, you can get a breakdown of the existing categories here and you can make our own categories too.
Once I do this for each transaction I end up with the paper receipt in a file irl, the digital receipt tagged and easy to find in Evernote and a third copy attached to the transaction in FreeAgent. Attaching the receipt isn't mandatory, but I like to do it so that everything is in one place and in the event of an audit I can go though line by line and explain everything right there in FreeAgent.
Other handy stuff I've done in FreeAgent
- I've categorised my work by kind i.e. illustration/photography/shop to see an easy breakdown of where my money is coming from each month.
- Breaking down the Cost of Sales categories to all the different elements of, well, my cost of sales, so I can see how much I spend on shop packaging, promotional materials, printing, postage etc.
- Any fees that get taken from Paypal payments and international bank transfers can be added back on and classified as a business expense.
- Dealing with cash is now a lot less annoying because you can split transactions and apply separate receipts to parts of a total amount. So for example, you're working at an event for the day and take out £40 cash to pay for 3 taxis, some office supplies and a coffee. Once you've imported it to FreeAgent, you can break it down in to several transactions, categorise them according to type and attach individual receipts.
There's loads of other cool stuff you can do with all this data in FreeAgent, like see your profit and loss, balance sheets, depreciation of capital assets, etc etc. Most of the aforementioned services let you do the same stuff, the most important thing is to find the one you like using best and get your data in there.
In FreeAgent I began by concentrating on taxes, but now I use the Invoices section to generate all my invoices and automatically send increasingly stern reminders if they are overdue. Likewise, I put in any invoices that I owe to others such as my printer, so that I know how long I have until payment is needed. When your income fluctuates and payment terms are anything between 30 and 90 days (never again) it makes everything much less stressful when you can see everything laid out on one page. With money coming in it's the same workflow as above, I just mark the incoming transaction against the invoice to explain it.
Once I've done all that, FreeAgent shows me a nice overview of my finances, including cashflow, bank account balances, open and overdue invoices for the last 3, 6 or 12 months in an easy to understand dashboard.
That's IT? That's not even hard!
Exactly, it's not hard at all! It takes me half a day every month to get up to date. When things are fresh in your mind it's much easier and the satisfaction of being on top of it is pretty addictive. We're just at the beginning of a new financial year, so if you want to make some changes to your book keeping system it's a great time to do so. Think how smug you'll feel when people are panicking about their tax return in January 2014 and you already did yours in Spring 2013!
Do let me know if this has been helpful to you. If you're self employed I'd love to hear about your accounting triumphs and tragedies too (believe it or not), do you use an online service or go it alone with spreadsheets? Y u make it so hard for yourself, bro? Did I manage to make the subject of accounting even a little thrilling? Isn't asking questions at the end of a blog post the most tedious comment fishing?? You tell me! *drops mic*