As our workforce grows increasingly more “flexible”…some might even say “unstable”…many people are trying their luck at starting their own business, or at least taking on temporary “contract” jobs where they’re not technically considered an employee. (From a tax perspective, a worker on a contract job is is considered in business for him or herself.) Most people taking this plunge don’t really know where to start as far as permits, licenses, tax responsibilities, legal requirements…the list goes on and on, as any self-employed person can attest. Well in this post I want to mention a few convenient and inexpensive (or free!) tools I’ve found that are helpful to new businesses.
Many people starting out feel almost obligated to purchase QuickBooks to start keeping track of their income and expenses. While this certainly isn’t a bad move–QuickBooks is a great accounting solution for many small- to medium-sized businesses–it may be overkill at first for solo operations and other very small businesses. When first getting started, many people just want a way to keep track of their income and expenses. They want to be able to organize everything at year-end so they get the maximum tax deductions, and they want to have some idea how much is going out compared to how much is coming in. And while a full-featured solution like QuickBooks can certainly do the job, really anything that can get the income and expenses onto a spreadsheet should be adequate while you’re still pretty small. And if your tax accountant requires you to use QuickBooks, it’s time to consider switching accountants. Gleaning the necessary information to prepare a tax return from a spreadsheet is a pretty easy task for most small businesses.
One important thing to point out here is if you’re going to operate as a business, even just an independent contractor, you should definitely set up a bank account that you use for all your income and expenses. It’s SO much easier to figure out whether or not that $30 spent at Target was office supplies (and deductible!) or a toaster (sorry, probably not deductible) if you know that everything spent from your “business account” was a business expense. Of course, you have to have the discipline to only use the account for legitimate business reasons…because just paying for that night at the movies with your kids from your “business account” doesn’t make it a business expense. Nice try, though :-)
Many bank accounts now come with some handy reporting features that may be all you need at first to track expenses. Basically, all you need is the ability to categorize expenses, and add an optional memo in case you need to add some extra detail. The date, amount, and location/merchant should all be a standard part of the transaction record. If your bank allows you to keep track of this information, and export it to a spreadsheet, you might be all set as far as tracking expenses.
If your bank doesn’t allow you to add categories and notes, then you might want to consider a free on-line tool like Mint or Expensify. I’ve used Mint (mint.com) for awhile for my personal expenses, and find it’s a very convenient way to track spending and know where your spending is going. You basically link your Mint account to credit card and /or bank accounts, and it automatically updates with all your transactions on a regular basis. It “learns” what merchants go with what category of expenses, but you can always recategorize if it doesn’t make the right choice. It’s pretty low maintenance once you’ve linked it to any accounts you want to track. Just check it periodically to verify the categories it chooses and add notes to any transactions that need more detail (e.g. meal expenses need notes about who you ate with and what was the business purpose to be deductible).
However, I’ve been using Expensify (expensify.com) to keep track of my receipts for a few years now. My favorite feature in Expensify is the ability to take a picture of a receipt on a smartphone, and then upload it to your account. Expensify will scan in the details (date, amount, merchant), and categorize it using rules it “learns” from your previous entries. I love this approach because now I have my receipts digitally stored. The IRS generally requires receipts for expenses greater than $75, or for meals, entertainment, and travel expenses of any amount, so keeping a digital copy of my receipts stored with my records is incredibly convenient. Expensify is free for up to three users in one company.
With Mint or Expensify, you get a lot of functionality for free, and you can export the results to a spreadsheet that can easily be sorted by categories at tax time. Expensify can also export to QuickBooks format.
Keeping track of income is often very easy for new businesses…because there isn’t much to keep track of! Maybe you just have one client, or a few clients, as you’re getting started, so keeping track of income isn’t really something you need help with. Or maybe you do mostly credit card billing, so your credit card statements already keep a record of your income.
But if you need an invoicing solution, there are again several free or inexpensive solutions. Freshbooks is becoming increasingly popular, and can be used for free if you only need to track one client at a time. However, the price jumps to $20/mth once you exceed that limit, then $30/mth when you go over 25 clients (but then it’s unlimited). Depending on what type of business you operate, you might hit that limit very quickly…like if you run a tax practice! On the plus side, though, Freshbooks also does expense tracking and allows you to take pictures of receipts and save them with the expense. I find Freshbooks isn’t quite as good with expenses as Expensify, but the good news is Freshbooks and Expensify can work together by using Expensify as a plug-in within Freshbooks.
There are undoubtedly many more options available for these tasks. But for a new business just getting started, it’s important to know that bookkeeping doesn’t have to mean a major software purchase and a steep learning curve. Start with a dedicated bank account and find a free tool to track income and expenses. As long as it can export to a spreadsheet, which is nearly universal in financial tools these days, then it should be fine for getting started.
If you find yourself overwhelmed with spreadsheet maintenance, then maybe it’s time to switch to a more powerful tool like QuickBooks. But hopefully by the time you get to that point, the investment in software and training will be a cost you can more easily stomach!