You didn’t become a consultant because you love bookkeeping (that is, unless you are an accounting consultant). Because time spent on bookkeeping is usually un-billable time, it is important to minimize the amount of time it takes to keep your financial house in order, maximizing the profitability of your business.
On the flip side, you don’t want to be sloppy with your accounting either. At a minimum, you’ll be leaving money on the table by not having a strong grasp on where you can save money in your business, and in some cases, may get in trouble with the authorities if you aren’t reporting income and paying taxes accordingly.
What follows is a basic primer on how to keep effective records as a consultant, how to discover ways to save money and increase profitability, and how to do it all without sucking up too much time.
Know Your Personal Success Number
If you ask many consultants how much money they want to make this year, often the answer will be: “As much as I can!” While none of us would turn down larger-than-expected income, we still need to know what our financial goals are in order to track whether or not we are on track to achieving them.
When you know what your financial goal is for the year, and know where you stand towards accomplishing that goal, you can more easily answer the following questions about your business:
- Can I afford to take a couple weeks off?
- Do I really need to be working this many hours?
- Can I afford to say “no” to this opportunity?
- Do I need to be more aggressive with booking more clients?
In order to determine what your personal success number is, break down the costs that you’ll have throughout the year both personally and within your business (not including expenses that are re-billed to clients). It can be difficult to recall all of the expense categories you might have for your business and personal budgets, this is where a revenue goal calculator can help.
You can take your goal for the year and break it down into monthly (or even daily) goals using a spreadsheet, or leverage an application like Harpoon or Cushion to automatically track it for you as you collect payments from clients.
Ensure that You Get Paid
Now that you know your personal success number, you’re going to need to start generating some income towards it! Assuming that you’ve already researched how to build a client pipeline, it’s time to ensure that your payment terms are going to prevent you from becoming burned by a flaky client (yes, it WILL happen).
Personally, I ensure a down-payment from the client before any work has commenced. You may be tempted to go loose on this one, especially if you have a new relationship with this client. However, asking for a downpayment before you begin work is usually pretty standard practice, and it sets the tone that you are a professional and conduct business accordingly.
Make sure that your proposal lays out clear milestones for progress in the project, and the payment to be expected at those times. Even if you only take 50% up-front and 50% on completion, set clear expectations for what a completed project looks like, and the exact payment to be expected at that point.
Finally, consider adding a late-payment policy to your contract, letting the client know that payment is expected within X days of invoice, and late payments will incur an additional Y fee every week or month. This shouldn’t be a problem if brought up at the beginning of a project, because most clients don’t start out with the intention of not paying you on time and they will foresee themselves as paying promptly. However, life does get in the way, and sometimes clients have excuses when the bills come as to why they need more time. If you’ve agreed on the late payment fees, the difficult conversation will have already taken place, and it will be less awkward as you explain to them how your business need to continue operating despite their setback.
Get a Dedicated Debit Card to Make Record Keeping a Breeze
One of the most basic pieces of advice for freelancers and consultants is to get a separate bank account for your business, if only to keep record-keeping much simpler as you’ll have a single balance sheet to record expenses and income.
All of your business expenses will be paid for from this account, and your income will be deposited here as well. When it comes time to taking income, you can simply write yourself a check and deposit that into your personal account. Again, keeping records plain and simple.
Use a Savings Account for Quarterly or Annual Tax Planning
Depending on what part of the world you do business in, you are going to have to pay some combination of taxes:
- GST: Government Sales Tax
- HST: Harmonized Sales Tax
- VAT: Value-Added Tax
- Federal, State, Local Income Tax
- Social Security & Medicare
- Self-Employment Tax
To know and understand more about your tax obligations as a consultant, it is advised to meet with a certified accountant in your area to help get started.
Many localities will require quarterly payment of taxes to ensure the government isn’t giving out free loans every year to those who owe them taxes. A business savings account can be a good place to transfer money from your business bank account to ensure you have the appropriate amount of cash on hand. This also prevents you from getting too excited by a higher number in your bank balance, when a good portion of that needs to be paid to the government.
Know Your Deductions
In order to make money, you often have to spend money. Fortunately the government realizes this and allows you to subtract those business expenses from your income when it comes to calculating your taxes.
Large expenses like computers and office space are often no-brainers for keeping as deductions, but there are a lot of less thought-of and smaller deductions that really add up if you are good at keeping records on them:
- Travel & Hotel: Conferences and client meetings are two reasons why you might travel for business. Keep receipts of all of your expenses while traveling.
- Home Office: As long as a section of your home is used primarily for business, you can deduct a part of your housing.
- Utilities: If you can deduct a part of your mortgage or rent as a home office, a percentage of your utilities that you use there can be written off as well. Don’t forget the cell phone bill too!
- Professional Development: Books, courses, and journals all count as business expenses if they help you improve professionally.
- Advertising and Marketing: Business cards, Facebook ads, anything printed or digital that spreads your brand and lands you business may be deductible, including your website and hosting.
- Software: Whether it is a one-time purchase or a recurring SaaS subscription, you can deduct the money you spend on software that helps you run your business.
- Mileage: This one is often overlooked, but you are also able to deduct mileage that is used for running your business. Unfortunately, this doesn’t include your commute to and from the office, but if you are going to and from the store to buy office supplies, that does count. Meeting with a client? Write those miles down, the savings adds up.
Now, a little disclaimer here, I am not a tax or legal professional and while the above categories are generally applicable, it is always best to consult an accountant to define your deductible expenses according to your regional laws and specific situation.
Which is a perfect segue to our next section:
Consider Meeting with an Accountant
It is tempting to be thrifty in your freelance business and skimp out on hiring an accountant. However, the cost of the accountant is usually more than compensated for in money saved, time saved, and headaches avoided due to improper accounting practices. That being said, hiring an accountant doesn’t mean that you can just sit back and let them run the financial aspects of your business. An accountant is like a partner in your business, and the more you understand your own finances, the more you can help your accountant find savings for you.
Running a consulting business can be stressful, but managing your business finances doesn’t have to be. With the right tools, a little understanding of core principles, software that helps you track your finances and meet your goals, and a little outside help from an accountant, you can maximize your profitability while minimizing the time needed to maintain your books.