It might be nice to have a crystal ball sometimes, but until that particular type of tech comes around, there are more practical ways to keep an eye on the financial health of your business. In short, it’s all down to the data that you capture, and what you do with it.
Recording the financial life of your business
As a business owner it’s crucial that you record every single transaction that happens. Each invoice that you send out for freelance work, every train ticket you buy to meet a client, the works. OK, so you need this level of detail ready for your tax return anyway, but it’s not all about HMRC.
Detailed bookkeeping also helps you to build a complete picture of how your freelancing business is really performing. Good records make it easier to see:
- Where you’re making money (are you surprised to see that a particular service actually outperforms another?)
- Where you’re spending it. For example, are your costs higher than they need to be?
- What areas might need a little attention in order to deal with any imbalances
- When you can expect pinch points (which in turn, can help you plan to avoid them being a bit too pinchy).
Using financial reports to keep things in order
A bit like saying the same word over and over, stare at any list of numbers for too long and they start to lose meaning. Particularly so if they didn’t mean that much to you in the first place.
Rather than scraping through endless lists of raw data, accountants arrange bookkeeping figures in a way that helps them make sense of what they’re looking at. If you use bookkeeping software (and what with the approach of Making Tax Digital for Income Tax Self Assessment, you really should), most providers include reporting functions which do this for you. Don’t be shy about shopping around and comparing accounting software!
If it all sounds like too much, you can talk to your accountant about producing regular financial reports for you, as well as for their recommendations about any action to take.
What sort of things should I be looking at in my financial reports?
The classic example is that turnover is vanity, profit is sanity, and this is exactly what you’re looking for in your reporting. Focus too much on the income that you’re making, and you might miss an opportunity to spot that your actual profits aren’t doing so well.
This could be for lots of different reasons, like costs being too high, or your prices too low. Your financial reports will tell you which. There are different types of financial report, and you can use these to look at things like:
- Are you making a good profit, or running at a loss despite high sales
- Whether customers are late paying their invoices. If so, are you sending invoices out in a timely manner? Could you send them reminders? Is it a particular customer each time (and if so, can you ask for payment up front instead?).
- Where you might be able to make cost savings
- If you can afford to make a purchase for your business and if not, what you can do to plan for it.
What different types of finance reports do I need?
This can be a really long-winded list, but most freelancers will only ever need a few core reports to look at. For example:
- Profit and loss reports allow you to see whether or not your work is profitable in a particular time frame.
- Cash flow forecasts use data about your finances to identify trends and then turn this into a projection of where your cash will be and when, so you can plan around it.
- A balance sheet keeps track of all your income, expenses, assets, and liabilities
Using this information will help you make more informed decisions about how you operate. For example, if a particular service is far more profitable, you might consider making that the focus of the work that you take on, or outsourcing projects to other freelancers.
You’ll also be able to clamp down on any unnecessary spending, and be more proactive about following up late payments. It all adds up to more efficient freelancing (and hopefully a more restful night’s sleep!).
Visit our Freelancer Financials hub for more guides and tips to managing your money.