In this follow-up to my piece on the tools for working in a home office, I’ll talk a bit about businesses processes, which I’ve had to work out as I go, sometimes on my own, sometimes with input from others. At some point, I’ll discuss business development and acquiring clients, so bear with me as I continue to learn.
Tracking Your Finances
First, I’ll plagiarize myself and reiterate my last bullet point from the previous entry on things you need to run your business:
- A business checking account and a method/place for storing receipts. The more business matters you handle with a dedicated business account, the easier you’ll have things come tax time…which, for the independent consultant, is once a quarter, when you file your estimated taxes. And you’ll want to save the receipts for the types of office supplies I mentioned above. Good luck with that.
As a one-person show, you’ve got to keep an eye on the business of your work, not just the work that is your business, if that makes sense. Remember Economics or Accounting 101? Income – expenses = profit. How are you to know if you’re making a profit if you don’t know how much you’ve taken in or how much you’re spending? The government will certainly want to know. If you’re not making a profit after three years, you don’t have a business, you’re practicing a hobby. At least that’s how the IRS sees it.
Now I’m a bit of an organization freak, but not to the point of organizing my receipts by date or keeping little note cards to accompany every little piece of paper. I do, however, keep all my business-related receipts in a single large envelope so I know where to find them.
Legitimate Business Expenses
This is as good a place as any to discuss the difference between legitimate vs. non-legitimate business expenses.
- Office supplies – and by office supplies I mean things that you normally use as office supplies. If you can make your accountant believe that you “need” a 72-inch flat-screen TV “to do research,” well, that’s your business.
- Utilities (cable, phone, power) – It’s easier to do this if you have an actual office, separate from your home. However, the way it was explained to me is that you need to do some calculations of how much time/space you actually dedicate to your work activities and treat those as a percentage of your overall bills.
- Parking and mileage for business meetings. And yes, you need to track your mileage. The current government rate for mileage (July 2014) is 56 cents per mile.
- Business travel you pay out of your own pocket (as opposed to business travel picked up by a customer who has requested it and is paying–no double-dipping!).
- Memberships/professional associations.
- Wifi charges at remote locations/airports/hotels if you’re working.
- Books/research materials that are work related.
- Gifts for clients – I’m on the fence with this one. Gifts to clients aren’t necessary, just nice. However, while you can probably make a case for such things as marketing expenses, you’ll need to have room in the budget for them. And just a reminder: actual bribes are beyond the pale, no matter how carefully you itemize. Al Capone got put in jail for tax evasion and because his bookkeeper was just a little too good about keeping the records.
- Leisure dining.
- Clothes/dry cleaning – my finance person might disagree on this one, especially if you are required to wear a particular wardrobe to work with particular clients and you only wear that wardrobe on business.
- Child care – this might be a deduction for your taxes. I’m the wrong guy to ask (SINK).
- Groceries, toys, yard tools, etc…
Your smell test for legitimate vs. non-legitimate expenses should be, “Would I buy this for myself if I wasn’t working?” If the answer is no, it’s a business expense. If the answer is “maybe,” ask a tax accountant.
First of all, you’ll need to create an invoice or receipt form. Or buy or download one. I use the invoice template from Microsoft Word, and I’ve modified it to meet my needs and the needs of particular clients. If you want to get fancy and make your own, here are some of the things your invoice will need to include:
- Your name or your company’s name.
- Invoice number.
- Your business contact information (address, phone, email, fax).
- The customer’s name.
- The name of the job you worked on or the name of the product/service you provided.
- If you’re tracking hours, include the number of hours and your hourly rate.
- Sales tax, if applicable.
- Date(s) when charges were incurred.
- Payment terms – I use “NET 30,” which means that full payment is due within 30 days of the invoice date. You might choose other terms, but those should be stated up front so there aren’t any surprises for your customer/client.
I also maintain a spreadsheet of all my invoices, in numerical order. Aside from the invoice number, I track the customer name, invoice amount, whether it’s been sent or not, and whether the client has paid or not. This will help you with the income side of your tax equation.
Because I charge by the hour for most of my services (I’ll cover rates some other time, if I remember), I have to keep close tabs on my hours worked and for whom.
I’m certain there are programs you can buy that do all this for you. I’ve heard good things about Quick Books, for example, and I might purchase it at some point because it’s built for small businesses. However, if you’re a relatively organized person, you can create your own spreadsheets in a format that makes sense to you.
Finding a Business/Tax Advisor and Filing Your Taxes
I’m fortunate to have a friend who does both. If you don’t, talk to H&R Block or someone who’s a professional–unless you enjoy the prospect of filing estimated quarterly taxes on your own. However, it’s good to know someone who speaks business/taxes because they’re a much better resource than just referring to your friendly neighborhood English major who’s learning as he goes.
Freelance income is variable. Even if employers/customers are taking taxes out of your 1099s, you’re going to need to track your taxes and, if you have other, non-1099 income, file estimated taxes quarterly. Part of that also means you have to set aside money from your income to write that check to Uncle Sam, come the day. Your best bet is to take out whatever tax bracket you think you’ll be in, then double whatever you might have paid for FICA if you previously worked for an employer did that for you. Say you think you’ll be in the 28% tax bracket and got 3% taken out for FICA at your last employer. That means you’ll need to set aside 34% of your income to pay those taxes so you have the money on hand when the end of the quarter arrives (March 31, June 30, September 30, December 31). Lucky me, I live in a state without income tax; if you don’t, you get to do some additional math and file a state return as well.
Maintaining Office Hours
Now maybe you’re a seat-of-the-pants person who likes to work whenever the mood strikes her–staying up with the coyotes until 3 a.m. That’s great. However, odds are, your clients might be used to more traditional business hours. It’s important, then, to set some office hours. And, if possible, stick to them. As an entrepreneur, you’re really in business development mode all the time, you just don’t realize it. If a client calls you to consult about a project for more than a few minutes and it’s outside your regular business hours, log the time and charge for the time, especially if you’re being paid by the hour. You’re not in the business of doing favors. People are paying you for your brain.
Maintaining an Office Space
Having a dedicated office space in your home is important for a couple of different reasons. First, just like a regular office, it’s nice to know where all your stuff is and to have it all in once place. Second, as I noted above, if a particular room is being used as your home office space, that needs to be consistent so you can carve out a consistent percentage of your utilities for office use.
Plus, and maybe this is just me–it’s good not to work in the same place where you do everything else–sleep, cook, socialize, whatever. This can help put you into your work “head space” vs. your domestic mind. Just as you would with a regular office job, it’s important to try to put reasonable restrictions on what constitutes a reasonable interruption. If you have little people in the house, this can be especially difficult. Not being a parent, I can’t provide a lot of constructive advice; however, my brother-in-law has a home office, and my niece and nephew have learned not to bug him when he’s in the office with the door closed because “Daddy’s working,” so it can be done.
Depending on the sensitivity of your work and the potential for visitors, you also might need an office with an actual door. Just throwing it out there.
Notice I haven’t said anything here about dress code or office culture or security procedures? Those things are up to you. I happen to favor Hawaiian shirts and shorts if I’m not expected to be anywhere. However, if I’m going to visit with a client, I dig out the khakis and might or might not replace the Hawaiian shirt with a golf shirt (this is Florida, after all). The point being, you can be comfortable in whatever way that suits you. That’s one of the advantages of working from home. However, if you’re going to be face-to-face with a client, you’ll need to put in a little more effort–bed-head isn’t a good idea, even on video teleconferences. Of course if it’s voice-only, you could be in bathroom and fuzzy bunny slippers. I know of people who work from home but still put on a jacket and tie when doing a business call to put them in the right frame of mind. Do what works for you, but remember that there are other people out there.
Being a morning person, I happen to believe that it’s important to get up at a regular time, shower, make myself breakfast, and get to work on a regular schedule–notice that I have regular “awake” time, if not exactly business hours listed on this site. Keeping yourself groomed and healthy helps with your attitude, so you need to take care of yourself so you have the energy and drive to keep yourself motivated.
And if you’re tired from working from home because all that quiet time (or loud time with the kids) is getting to you, you might try coworking. This is a relatively new phenomenon in the last decade, but basically it’s an environment where you pay by the day, week, or month to have an off-site work space. This gives you the opportunity to talk to people without the burden of actually working for anyone but yourself. Of course if a social space doesn’t work when you need to concentrate, don’t go that day. That’s one advantage of the freelancing lifestyle.
One last thought: if you’re working from home, you no doubt believe you can do so reliably. If you need the motivation of someone standing over you, perhaps working from home isn’t for you. But if you’re self-propelled, this means you can continue to deliver your work on time and with a quality that others are willing to pay you to do it regardless of where you work. The trick is to keep yourself motivated and organized for success.
I use OfficeTime to track hours per project. It’s easy, inexpensive, and creates a number of reports that can export to an Invoice, a Spreadsheet, etc…