A simple bookkeeping system for your freelance microbusiness

It’s almost the tax submission deadline (for businesses) again. This year, I handed my accountant my records a whole 5 weeks before the deadline, so she has plenty of time to compute my taxes.

It wasn’t always like this. Filing my tax return in the first 2 years of running my business was a big headache and involved sleepless, stressful nights leading up to 30 June. I’ve come a long way since and thought I would share my process to help individuals just starting out.

Disclaimer: I am not an accounting professional. What follows is what works for me – your own mileage may vary. You should take this article as a guide, and consult a licensed accountant for specific questions.

The Objective

First, let’s be clear about what my system is and isn’t. This process works to:

  • Record invoices and payments (money in)
  • Record expenses (money out)
  • Make it easy for you or your accountant to compute and file your taxes

This system isn’t a solution to:

  • Be an accounting solution
  • Generate financial statements
  • Forecast your business financials

It’s important to stress that this isn’t really an accounting system – it’s more of a bookkeeping system. For most freelancers and sole proprietorships though, it is quite adequate.

If you’ve just started your business, I don’t think you need a full-on accounting solution like Quicken or MYOB. It will confuse you and make it an enormous chore to keep your books in order. Just keep it simple for now.

Getting Set Up

Your bookkeeping will not magically fall into place without preparation. Here’s what you need.

Bank account

Do not mix your business and personal bank accounts. Ever. Even if you haven’t formally registered your business, go open a separate account just for your freelancing business.

Ideally you should open a current account so that you can write cheques. However most banks in Malaysia require that someone introduces (vouches) for you before you can open your current account. Maybank’s basic current account also requires a minimum deposit of RM500. If your business is more than a side job, go open a current account.

If you are just freelancing on the side and feel that you can make do without writing cheques, you should at least open a savings account with online banking. This way you don’t need to run to the ATM to make a bank transfer every time you need to pay someone.

Start using invoicing software

Upon completion of a project or at the end of the month, you send the client an invoice stating the amount owed by them for your products or services. You can generate your invoices manually with a word processor or spreadsheet software, but it’s much better to use dedicated invoicing software because it can generate reports, track who’s late to pay you and more. Remember to look out for specific features like multiple currencies or time tracking if you need them.

Web-based invoicing software

There are many options for web-based invoicing software. Many are free for basic use, but charge you a monthly fee when you need to send more invoices. Invoiceable is a great service and it only costs a 1 time payment of £49 to remove their branding. Alternatively,  The Invoice Machine charges based on the number of invoices you send. PayPal also provides a full-featured invoicing solution.

Most of these services will allow you to also create estimates, which can be easily converted into invoices after clients have agreed to the estimate. Many web-based invoicing software will also give you the ability to send invoices via email, complete with a Pay Now button that integrates with PayPal and other online payment systems.

Another web-based invoicing option is Pancake App, a self-hosted invoicing and project management web app that you install on your own server. You get all of the benefits of the apps mentioned above, without the monthly fee. You’ll need a little technical ability to set it up (they offer a setup service), but once it’s done the app is almost as good as the desktop invoicing options below.

Desktop invoicing software

Personally I prefer using a desktop invoicing software because there are no monthly fees. The software that I use is Billings for Mac and costs USD40. Billings has been discontinued, so take your pick from this list of invoicing and time tracking apps for Mac. There are many Windows equivalents. It’s one of the best investments I’ve made for my business because it saves me time, and my time is worth much more than the money I paid for it.

If you only generate a few invoices a year (2 or less a month) you could get by with Excel or Numbers.

Whatever invoicing solution you use, make sure that you number your invoices in ascending order, and never duplicate invoice numbers.

Set up your spreadsheets

Since we are keeping things simple, we are going to use the good old spreadsheet for our bookkeeping. We’re going to need 2 sheets:

The Cashbook records all of the payments made into and out of your business’s bank account.

The Expenses sheet records all of your business-related expenses. D’oh, right?

Here’s a sample sheet that I made with Google Docs which you can use as your template: Simple Bookkeeping for Freelancers & Sole Proprietors. Alternatively, you can download the Excel version.

The Process

Finally, we’re getting into the actual workflow of the bookkeeping system. Here’s how it goes.

Step 1: Record Invoices

Using your invoicing solution, generate invoices for each service or product you provide. Make it a habit to invoice clients every Monday, so that your invoices are never more than a week late.

Step 2: Record money in and out

Money in

When you receive a payment for your invoices, note down the cheque number and bank in the cheque. In your Cashbook, record the date, amount (money in), the invoice that is being paid, and cheque number. Refer to the sample spreadsheet from above. Print out your invoices, or summary of invoices to file away.

Your Cashbook will reflect the money in and out of your the bank account for your business. However, because you have added the details above, your accountant can connect the money you received with the cheque that was used to pay it, and the job that it paid for. At the start of a new month, copy the end balance to the new month (refer to the Cashbook in the sample spreadsheet)

Money out

There are 2 types of money out for your business – direct expenses and claimed expenses.

1. Direct expenses are paid from your business bank account for expenses related to the running of your business, e.g. paying suppliers and vendors, buying goods which you re-sell back to your customers, etc. Pay for your business expenses with your cheque book and record the date, cheque number, amount and payee into your Cashbook. Print out the invoice or bill that you paid for and file them by month. If you don’t have a cheque book, pay with online banking. Be sure to print out the transaction receipt and file it away.

When paying money out, you can also use a Payment Voucher to show that money has been paid out of the bank account and to show who the money was paid to. I personally don’t issue PVs to suppliers and vendors as some of them are outstation and it’s difficult to get their signatures.

2. Claimed expenses are paid from your own personal accounts (cash, credit cards) for expenses related to the running of your business. For example, I need to pay for my client’s Facebook ad campaigns with my own credit card because my business bank account doesn’t have one. In this case, I record the date, item, receipt/bill number, category and amount into the Expenses sheet. Add your own categories to the ones below.

You should also record expenses for your personal meals and entertainment, petrol, phone and internet bills, vehicle maintenance and electricity bills. Why? As a sole proprietor, you are the business. It wouldn’t exist without you. So a percentage of these personal expenses are claimable as business expenses. Your accountant will work out the exact percentage when computing your accounts.

Here are some of the personal and business expenses that you can claim for. Use these categories in your expense to help your accountant work out how much you can claim:

  1. Meals and entertainment
  2. Upkeep of computer
  3. Office expenses
  4. Maintenance of motor vehicle
  5. Electricity
  6. Petrol
  7. Telecommunication
  8. Medical
  9. Tax / accountant fees

For all money out transactions, remember to save and print out the receipts, bills or invoices. You need to prove that you paid for these expenses. I glue all my petrol and meal receipts to sheets of paper so that they’re not loose and so they are easier to file.

Step 3: Pay yourself

Every month you should reimburse yourself for the claimed expenses that you’ve paid from your personal accounts and make a draw. Total up the previous month’s expenses and issue a cheque to yourself for that amount. As a rule I only reimburse my expenses for a whole month.

Referring to the Expenses sheet, if I only process my claimed expenses on 7 Feb, I will only reimburse myself for Jan. The expenses incurred on 3 and 4 Feb will be grouped together with the rest of Feb expenses when I process them in March. This makes it easier for me to keep track of what I need to reimburse myself.

Besides reimbursing expenses you can pay yourself with an owner’s draw. Owner drawings are when the business owner takes money out of the business. It doesn’t have to be a set amount each month, feel free to take as little or as much as you need. However you should leave some money in the bank account so that the business has money to pay suppliers and vendors.

When you pay yourself, you should also use your business’s cheque book and record the money out in the cashbook. Here’s where the Payment Voucher comes in handy – issue one to yourself to show that you received the money from your business.

Filing Your Taxes

If you’ve followed this system, you can simply give your accountant the Cashbook and Expenses sheet along with the other supportig documents when it is time to file your taxes. Using the information you have compiled, the accountant can easily generate your profit and loss statement to calculate your business profits for the tax return.

Why do all this work if you need an accountant to file compute your accounts? Because it’s even harder to track everything, and then generate your financial statements. If you don’t know what are the 4 basic financial statements, hire an accountant. It’s not worth the headache.

Remember that you are legally obligated to file your tax return and pay your taxes. I don’t imagine it would be very fun (or profitable) if you are hauled up for not filing your tax returns and then going through years worth of bank and credit card statements, bills, etc to try to figure it out.

Understand Your Business

Beyond taxes, balancing the books for your business allows you to better understand the financial standing of your business. Many freelancers and microbusinesses have an idea of how much money they are making, but don’t have any idea how much they are spending. I was like this, and I had no idea if I was profitable or if I was wasting all my profits away with my expenses.

Having your books in order also informs you how much it costs to run your business, so that you can plan and budget how much revenue you need to make each month. Ultimately it will give you a sense of control over your business, and with that allow you to run your business better.

I hope this article was useful. I will update and revise it as I go along when I get new information from my accountant and other sources. Please feel free to ask me questions in the comments about the system. However if you have more specific accounting questions I would advise you to consult a certified accountant.

All the best with your bookkeeping!

Updates

12 Nov 2013 – Removed Billings from recommendations because it was discontinued in June 2013 in favour of the subscription-based Billings Pro

28 Jan 2013 – Now recommending Pancake App over the Client Machine WordPress theme

19 Nov 2011 – Added common expense categories that are claimable / eligible for write off

30 Comments on "A simple bookkeeping system for your freelance microbusiness"

  • Pei Chyi says

    So glad you’ve got all this sorted after 2 yrs of big headache.
    *pats ur back*

  • CK Wong says

    Great article!

    I use GnuCash and it has been great!

  • Awesome!! OK la if I can really do it for free without a paying a monthly subscription fee, I totally should :p

    Thanks for the tips!

  • blogjunkie says

    Thanks for the positive comments guys! I hope it helps somebody out because I had no one to tell me this when I just started..

  • Juan says

    i thought i got them sorted, until i changed from sole proprietor to sdn bhd. that was my biggest and major headache. went thru 2 years of hell too i would say, but this year should be breezy….very soon.

  • Amran says

    Nice article, have the same ideas but not materialize to a blog post:p. Anyway, thanks for sharing.

  • Leona says

    Thanks for writing this, very very useful guidelines.

  • Juan says

    Btw, any software to recommend or came across one that allows you to input deposit, then track deposit returned.

    Invoicing is easy, but something that needs to bill deposit and return back is kinda tricky. scratching my head now hehe

    • blogjunkie says

      Hey Juan, if you need that level of detail maybe you should stepping up to dedicated accounting software. I’m using Quickbooks now – not cheap though..

  • Wow, great tips.. Thumbs up… A simple invoicing software is very useful in tracking the cash flow of your business, and you probably doesn’t want to overlook other invoices so you have to closely monitor each money that comes in and goes out of your business.

  • Elly says

    Thanks for this article. I’m just now starting my business, and your info has been very helpful.

    • blogjunkie says

      That’s awesome! I’m glad that I could be of help

  • Thanks for your article. We are currently using and promoting FrontAccounting. It is an Open Source Online Accounting Software which is freely available for downloads. Does anyone heard about it?

    • blogjunkie says

      Hi! Thanks for your comment and introducing AntERP. But from your website:

      AntERP.com is an Enterprise Software

      (Emphasis mine)

      This article is for freelance microbusiness la.. Your product looks too complicated for freelancers to use, with lots of features that we don’t need. I would rather stick to Excel for managing my accounting.

  • Agreed. Enterprise Software was too complicated for freelance microbusiness. Currently, we have narrow down our scope and focus only on Shopping Cart, Online Accounting and CRM system.

  • Wow!This is simply great. I am glad that I have found something comprehensive like this to help me out. This is really useful. I am now using a reliable expenses sheet to help me in my business expenditure.

  • lynn jones says

    thank you so much for the advise and the guidance as to how it can be as simple as recording moneys in and out in the format of a spreadsheet. I shall follow your instructions and already im feeling less stressed about embarking on my n ew business as sole proprietor this week.

    lynn

  • Forest says

    Keeping records of your business transaction in excel seems easy and simple. However, data maintained in excel is rigid, static and non-elastic. It does not cater for detail analysis, and the system will not scale. Try des accounting software from accountingdes.com or GnuCash, as a start in recording your bookkeeping transaction in a DBMS.

  • Chromilo Amin says

    Great advice. I also use the spreadsheets to keep track of money in and expenses. It’s simple and lets me file my taxes quicker. I’ll take a look at your template to compare.

  • Carlos says

    Great and fantastic for sharing this. I’ve gone through the blog and I must say it is superb! That shows how honest and sincere you are in assisting others. I pray and hope you will continue to lead a happy, wonderful, prosperous life and successful business as you really deserved it. Many thanks!

  • I’m really mulling over your advice to bill weekly – for cash f_l_o_w_…

    My business obviously has much simpler accounting than yours. I only have 2 or 3 clients a year, and they are billed monthly. Maybe I fit the “consultant” category better than “freelancer.”

    Most small business owners should follow your advice.

    Bookkeeping for me is a few steps simpler:
    – half-done quarterly, when I tally invoices to remit sales tax
    – all receipts go into a series of envelopes – roughly according to the 9 categories you listed – and are only tallied just before it goes to the accountant at year end

    Outstanding invoices are my main concern. I follow up on them when they are due, and weekly thereafter. Most are paid promptly, but there’s not much that is more frustrating than missing out on income just because you haven’t kept track of money you are owed.

    The only thing more frustrating is missing out on income because you didn’t invoice! (A common freelancer mistake.)

    Of course, in the early days (or in times of change) it seems important to keep a MUCH closer eye on expenditures and income. Today’s expenses are MUCH simplified. I don’t even have pen and paper expenses; just the monthly phone and internet bills, and occasional computer stuff or book.

  • Rebecca says

    Hi David:

    This is awesome! While my blogging businesses still isn’t making a profit, I am starting up another business as an freelancer that will require me to do some invoicing and the guidelines you’ve outlined here are really very helpful. Thanks for making it seem so simple!

    • david says

      Glad you found it useful!

  • Thanks for this informative post, David! I downloaded and used your excel form immediately.
    Kudos, from a music producer who hates doing accounting!

    Reuben

  • Tee says

    Great & sincere sharing… thanks

  • Johnny says

    Hi! Thanks for the great tips. As I’m working as freelancer I found some great tools here. I also would like to suggest an invoicing app that I’m currently using http://inv24.com/ It’s amazing web app and it’s free.

  • Jose says

    Hi, thanks for the tips. I started running my own business and every now and then I need to move money out of my business account into my personal account. I mark those as expenses with tittle “Personal transfer”. I know those are not included as “real” expenses but like you mentioned those are still expenses and fall into that category right? So from the accounting point of view that’s where they belong I hope.

    Cheers.

    • Hi Jose, when you move money from your business to personal accounts it’s not an “expense” — that’s an “owner’s draw” if you are a sole proprietor business. See the section on paying yourself above. Hope that helps!

Trackbacks