This past week, a friend who is just starting out in freelance writing asked me, “How do you do your accounting?” I realized that the answer was not quite as straightforward as I might have liked. Therefore, you (and my friend) are getting a blog post on this topic. The reason “accounting” can be challenging for the freelancer is that there are multiple ways to track your money. There are software programs out there to do these various tasks, and I’ll share those (with some additional input from my CPA brother in law, Jim); however, this post will cover how I do accounting. You have been warned.
Overview of My Approach
I have a set of Excel spreadsheets for tracking various aspects of my business. It never occurred to me to buy software, because a) I was poor when I started freelancing; b) I have enough knowledge of Microsoft Excel to create what I need; c) now that I’m more established, I’m cheap; and d) I like my system. However, it’s not for everyone.
What I discovered as I went along was that I needed different spreadsheets to track different aspects of my business. For example:
- Work/Billable Hours
- Income and Expenses for Tax Purposes
- Overall Finances
Again, there are software packages that track these. What I discovered was that it was easier and cheaper (for me) to create spreadsheets to meet specific needs rather than learn someone else’s way of doing things. One spreadsheet to do all of this might be doable, but my Excel skills only go so far.
When I was in a corporate environment, the software program I used most often to track my hours was Deltek. Doubtless there are others. What I recall from working with Deltek was that the software tracked hours down to .25 or .5-hour increments and that work was often tracked by job number (or, in the science/engineering world, Work Breakdown Structure/WBS item). This is necessary when I have customers assigning me to different job numbers (e.g., Proposal 1, Proposal 2, and Engineering Document 1).
Other times, I’ll have a customer who lumps all of my work into one job number, but they still want to know what I’m doing when I’m on the clock.
In the example above, Customer A wants my work tracked by job type, which they attach a job number to on their end. Customer B has one job number, but I’ve noted which tasks were done on each day.
The days of the week are set up calendar-style so I can match dates with dollars easily. I create a separate worksheet per month.
You can also see that I’ve got a total table in the upper-right of the spreadsheet. If you’re not Excel-savvy, I created those totals by inputting the formula =J9+J19+J29… etc. I’m inputting the cell locations for each customer’s weekly subtotal. Those weekly subtotals are created by clicking on the AutoSum button on the Home toolbar (below) and selecting the cells/row I want added up.
Or, if you want to speak a little computerish, you can add this formula…
…which tells Excel to provide the sum of all the amounts input into cells C10 through I10. Daily totals are worked in a similar fashion. From a cell at the bottom of the column, you would click on AutoSum and use the mouse/cursor to select the cells you want added. That, or add the formula…
[Note for the literal-minded: this formula will vary by the specific cells you want to add; C4 and C10 are not magical codes. The key thing to remember is =SUM(FirstCell:LastCell)]
Yes, this is a little labor-intensive to set up, and occasionally I have to make room for new customers, but this system helps me know what I worked/earned and when. That’s a whole lot easier than trying to remember and guessing at the end of the week–customers tend to frown on that. One thing I do to make sure there are no questions about my hours is to put the time I started in the appropriate day/customer cell, then put in the total time (to the nearest quarter-hour/15 minutes) in the cell once I’m done with the task.
A couple years ago I started tracking hours by month so I could gauge how many hours I was getting from each customer and when. This is also useful for identifying how I’m spending time and planning the best times to take vacations.
Again, it’s just spreadsheet math. I’ve included a divided bar graph so that the individual customer’s portion of the monthly total is depicted visually. You might want this, you might not. As for how to create a graph, I’ll defer to Excel’s help function; however, trust me: it’s not that painful. Advanced students of Excel might create links within your spreadsheet to automatically populate the monthly totals. I’m lazy, so it’s just easier to input the hours manually; but hey, it’s your spreadsheet! (Note: hourly rates are fictional for reference only and don’t reflect my actual rates.)
While I generate my invoices in a Word template, I track the totals in Excel. Jim tells me that Expensify can be used to track invoices, which are driven by the hours you’ve been tracking. I had the data, so I decided to use this spreadsheet to track my total income over time (this becomes useful at tax time). If you don’t want to do that, you can also use this sort of spreadsheet to sort invoices by dollar amount, customer, or status.
This spreadsheet also helps me track if/when invoices have been paid. If someone has paid me, the invoice appears in green; if I’ve submitted the invoice but not yet been paid, the row appears in yellow; if I get someone who just doesn’t pay me, the row is highlighted in red and written off. It doesn’t happen often, fortunately. (Note: dates/amounts are for demonstration purposes only.)
Income and Expenses for Tax Purposes
Having been raised by a bookkeeper who worked (mostly) with pre-digital accounting, I got attached to paper receipts for tax purposes. As a result, I keep my business expenses in a Manila envelope and add them to yet another spreadsheet as they appear. Jim plans to drag me kicking and screaming into the 21st century by getting me to track my expenses electronically on Expensify. That will be a separate blog post. In the meantime, here’s how I have been tracking the information Uncle Sam wants to know when self-employed individuals pay their taxes…
The tax laws in the U.S. changed in 2018, so it’s entirely possible that many of the items I itemize for my tax accountant (yes, I hire someone else to navigate the 1040 SE) are now out of date. However, for your general reference, the business of You, Inc. makes a profit or loss by subtracting expenses from income. Some of your business expenses include:
- Office supplies and furniture
- Computers and related hardware
- Coworking expenses
- Travel expenses
- Insurance (business and medical)
- Driving mileage
For your own receipt tracking and spend categorization, Jim likes Expensify: “You can smart scan receipts. Track mileage with GPS, and other nifty little features. But it might fall a little short of tracking hours for billing clients. You can track your hours by customer – and do your billing straight from the tool. If you need to submit expense reports to your employer for reimbursement – you can also do that directly from the tool.” This would seem to cover most of what I’ve been doing on my own with multiple spreadsheets, so perhaps it’s time to upgrade.
On the income tab of this Excel workbook, I copy/paste my invoices from the aforementioned Invoice Tracking Spreadsheet and add in a total amount. One time I forgot to include a couple in my copy/paste activities and accidentally underreported income. Note to self (and you): DON’T DO THAT!
This could be a topic all to itself. However, for the sake of clarity, I’ll include it…again, without visuals. You can organize your spreadsheet as you see fit.
When I started this effort (in 2003), I just wanted to know was “How am I doing?” (The unspoken question being, “Can I retire at some point?”) Again, this amounts to assets and liabilities. I don’t speak dual-entry accounting, but I do understand the difference between what I own and what I owe. Originally, I had a single worksheet listing all of my various assets–cash, stocks, mutual funds, etc.–and debts: credit cards, car loan, etc. I added up each column, subtracted the debts from the assets, and that showed how I was doing at one particular moment in time.
Being more of a capitalist and number-lover than some English majors, eventually I got curious about my progress and financial improvement over time. I used to track this stuff weekly, but that got a little too time consuming and, quite honestly, stressful. Capitalism is a dynamic system, and the volatility of the market can make the anxious observer…well, nervous. Tracking my status monthly seemed like a good compromise. As a result, my main page tracks a moment-in-time status, usually at the end of the month. That same data is then entered into separate asset and debt worksheets broken out by month. I have a fourth worksheet that tracks the overall state numerically and graphically by month.
I’ve also added worksheets to track my annual income and overall financial state (assets – liabilities) over the years. I’ve been tracking this stuff for >16 years, and it’s proven useful for future planning.
As you can see, accounting for your freelancing business includes several moving parts. Keeping all those parts organized–using whatever system suits you–can bring a little order to what might otherwise seem a messy business.