With the exception of accountants, bookkeeping isn’t often a priority for freelancers.
It’s one of those tasks that are often considered a nuisance and distraction. As such, many freelancers spend as little time as possible on keeping those ends in order. The result is often that bookkeeping and record keeping tasks are often done at the last minute and haphazardly.
The image of the busy entrepreneur at tax time holding a shoebox full of crumpled receipts may be stereotypical, but there is some truth to it. That’s a shame, because every freelancer should prioritize bookkeeping. Here are six reasons why.
1. Your experience with your tax accountant will be painless and less expensive
If you use an accountant to handle your tax filing, there’s a good chance you will be charged by the hour. These rates aren’t cheap. If you present your accountant with the aforementioned shoebox or have sloppy and incomplete records, that’s going to be a problem.
Think of it this way. Would you prefer to spend upwards of $100 an hour for an accountant to sort your receipts and clean up sloppy financial records, or would you prefer them to spend that time ensuring that all of your tax forms are filled out properly and filing your taxes for you?
Keep in mind that tax preparation fees have gone up an average of 5.4% each year. The last thing you need is to add to that cost.
2. It will be easier for you if you get audited
It’s gut wrenching to receive notification that you’ve been selected for an audit.
However, the only sure way to get through the process as easily and painless as possible is to have your financial records in proper order. Remember that many of the things that freelancers do such as taking deductions for home office expenses can cause the IRS to select them for an audit. Your good financial record keeping can help clear things up.
Further, by prioritizing bookkeeping, you are much less likely to make mistakes in your filings. This means tax authorities are less likely to find red flags that give them cause to audit you.
3. You’ll have an easier time keeping up with your daily business tasks
Once you have things in order, and you invest a bit of time in staying on top of things, keeping your books isn’t a monstrous task. It’s a bit like tidying your home for twenty minutes everyday vs. letting things become a wreck then going on an hours-long cleaning spree.
Once bookkeeping is a part of your routine, you’ll be able to spend minimal time on it. This means you can focus more on the day-to-day operations. Even better, you can begin planning for growth and expansion.
4. You will be in a better position to protect your assets if things go south
Let’s face it. Things go wrong. You could face a lawsuit from an angry client. You and your business partner could have an unresolvable disagreement. Your business along with your assets could become the subject of a contentious divorce proceeding.
During a legal proceeding, the financial records that you keep are likely to play an important role. Your lawyer will be much better able to prove that your assets and funds are truly yours if you have kept clean records.
5. There could be legal ramifications if you don’t care at all
Depending on where you live and the business you’re in, there may be legal requirements in terms of your financial record keeping. These may apply if you hire an assistant, for example. If you are found to have failed to keep proper records, you could be subject to civil penalties such as fines. Keep in mind that these penalties can be significant.
6. It helps you to identify potential issues
Are you going to have some cash flow problems in the next few months? Are you hemorrhaging money covering daily expenses? Worse, is there a serious error in your accounting that is causing serious damage to your working capital and bottom line?
Poor accounting and bookkeeping can prevent you from noticing serious financial irregularities. The more organized your records are and the more you know about your financial picture, the better you will be able to recognize and deal with issues before or when they come up.
Bookkeeping isn’t the favorite task of most freelancers. It is admittedly detailed and at times a bit dull. However, it is an extremely important part of running a successful freelancing business. Staying on top of this job will help ensure your ongoing growth and prosperity.
Image Credit: Shutterstock
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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