It’s a business! One way or another you have to keep track of and manage money in your consulting business. Whether you do it yourself, or use professionals or services is up to you.
I’m not an accountant or bookkeeper, so I will tell you about my personal experience and mistakes in the hope that it saves you from some avoidable problems.
While I love data and statistics and patterns in numbers, dealing with finances is not fun for me. If you enjoy dealing with finances, or have a financial background you’re ahead of the game.
Table of contents
Set up your business structure and know your tax responsibilities
In previous posts and on the Get Started page, I have written about registering your business, and some financial aspects, especially making sure that you understand your tax responsibilities. For example, I addressed getting an Employee Identification (EIN) from the Internal Revenue Service online, opening a business bank account, getting a credit card, and a little about accounting software.
Get the services of an accountant
Accounting is the language of business
Warren Buffett
I needed someone to deal with money and tax responsibilities in my consulting business. You could get around this, but in the initial stages it is best to get use an accountant.
To me it seemed easier online to identify a suitable lawyer than an accountant.
I found an accountant by asking other people who had their own consulting businesses for their recommendations.
An accountant can help you to set up your books correctly in an accounting app and can prepare your taxes. Even if you ultimately use the services of others in the financial sector, it is best to have the advice of an accountant at the beginning.
Use an accounting app to track money going in and out of your business
First I tried free accounting software, but I found it was not adequate at the time. I had no accounting or bookkeeping experience, and I needed more help than was available. Free accounting software is much better now.
QuickBooks had plenty of information online, courses and consultants. I decided to buy a desktop version of QuickBooks. I played around with it and used their help link to learn about each next step.
Finally, I looked online for someone to help me set up QuickBooks properly and give me a crash course in how to use it. I chose a consultant who lived not far from me. She turned out to be an accountant, who did some taxes. Though, she preferred teaching how to use QuickBooks and doing bookkeeping to the general accounting side of her business.
She came over to my office helped me set up a chart of accounts. By that time I had read that you should set up a chart of accounts in your accounting software. I had set up my own version.
The chart of accounts is how you categorize the money coming into and out of your consulting business. What I had done was not good enough and she fixed it. She then taught me how to use QuickBooks.
Her price for all this was really a good deal.
If I were starting out today, I would begin with online accounting software. While I have mainly used QuickBooks, I did switch to Xero for a while, but I found it did not meet my needs at the time as an S corporation. I had gotten used to the detailed reports that I could generate on QuickBooks.
Many options are out there, such as Zoho Books , Sage, Wave, Oracle Netsuite, and many others. Wave, for example is free, but it does not have an audit function. Some online accounting software, such as Zoho can be part of a suite of functions that help you to track time and take care of customers (for added cost.) It is best to look at the many reviews and comparisons for small business accounting apps online.
For most people making the transition to consulting, money is a concern. You can consider services that are free or low cost as I did and change as necessary. When you sign up for accounting software make sure that it has the features that you need. It can be a challenge later on to switch to another accounting app.
Even apps that are free may charge you when you exceed a threshold revenue. Your accountant may be able to use some accounting apps without cost or they may have to pay them.
For example, your accountant would need to pay for an accountant’s version of QuickBooks. Without that version, your accountant would not be able to access your taxes in a QuickBooks accountant’s file.
More tax accountants are familiar with QuickBooks than other accounting packages. For Zoho Books, though, your account would allow for an accountant to log in, but might not be familiar with it.
It seems to me that QuickBooks is overly expensive.
Comparison of accounting software apps
H3Set up your business structure and know your tax responsibilities
| Features | Zoho Books | Wave | Xero | QuickBooks |
| Pricing | Free plan for businesses with less than $50,000 revenue/year. $15/month for 50 contacts and 1 users + 1 accountant. | Free to use, with paid add-ons for payroll, payment processing, and bookkeeping services | Starts at $3.25/month for Early plan for first 3 months, then increases to $13/month. Unlimited users including accountant. | Starts at $15/month for Simple Start plan for first 3 months, then $30/month |
| Invoicing | Allows for customized invoices with templates and automated reminders | Offers customizable invoices with templates and automated reminders | Offers customizable invoices with templates and recurring invoices | Offers customizable invoices with templates and recurring invoices |
| Expense tracking | Allows for tracking expenses and receipt scanning through a mobile app | Tracks expenses and receipts with the ability to categorize expenses and add notes | Tracks expenses and receipts with the ability to categorize expenses and add notes | Tracks expenses and receipts with the ability to categorize expenses and add notes |
| Bank feeds | YES Automatically imports bank transactions from banks and financial institutions | YES Allows for bank transactions to be automatically imported | YES Allows for bank transactions to be automatically imported | YES Allows for bank transactions to be automatically imported |
| Inventory | YES- with purchase orders and stock adjustments | NO | YES – with ability to track inventory and set reorder points | YES – with ability to track inventory and set reorder points |
| Time tracking | YES – Allows for tracking time for billing and project management | NO | YES – with and can create time sheets and billable time | YES – and can create time sheets and billable time |
| Reports | Offers over 50 financial reports and customized reports | Offers financial reports such as profit and loss, balance sheets, and cash flow statements | Offers over 50 financial reports and the ability to customize reports | Includes over 80 financial reports and the ability to customize reports |
| Integrations | Integrates with over 40 other Zoho apps and also third-party apps | Integrates with payment processing services such as PayPal and Stripe, as well as other business tools | Integrates with third-party apps | Integrates with third-party apps |
| Customer support | Offers 24/5 live chat, phone, and email support, plus a knowledge base and community forum | Offers email support and a knowledge base | Offers 24/7 support with email, chat, knowledge base and community forum. No inbound telephone support, but will call you if necessary. | Offers 24/7 support with phone, email, and chat options, as well as a knowledge base and community forum |
Since QuickBooks is the most widely used below are some comments comparing Zoho, Wave, and Xero with QuickBooks.
Zoho versus QuickBooks
Both Zoho Books and QuickBooks offer a wide range of features for small businesses, including invoicing, expense tracking, and bank feeds.
Zoho Books has a lower starting price and the price does not increase after 3 months, but QuickBooks has a larger number of integrations and offers 24/7 customer support.
Ultimately, the choice between Zoho Books and QuickBooks will depend on the specific needs and budget of the business.
Wave versus QuickBooks
Wave offers a free accounting software with optional paid add-ons, while QuickBooks offers a range of plans starting at $15/month. Both Wave and QuickBooks offer invoicing and expense tracking, as well as the ability to automatically import bank transactions.
QuickBooks has more extensive features such as inventory management (which may not be particularly useful for independent consultants) and time tracking, while Wave focuses more on financial reporting.
QuickBooks offers more integrations and 24/7 support, while Wave offers a simpler user experience and a free option. Ultimately, the choice between the two will depend on the specific needs and budget of the business.
Xero versus QuickBooks
Xero and QuickBooks offer similar features for small businesses, including invoicing, expense tracking, and inventory management.
Xero offers a slightly lower starting price point than QuickBooks, but QuickBooks has a larger number of integrations.
Both offer time tracking and a range of financial reports, with Xero offering over 50 reports and QuickBooks offering over 80 reports.
Ultimately, the choice between the two will depend on the specific needs and budget of the business.
Should you hire a bookkeeper?
“Making good judgments when one has complete data, facts, and knowledge is not leadership – it’s bookkeeping.”
Dee Hock
The person who helped me with QuickBooks offered bookkeeping services, but at that stage it seemed too expensive. You can give bookkeepers all of your receipts and transaction records to track money in your consulting business. They can enter them into your accounting software and reconcile the items and make sure the books are balanced.
I did not hire a bookkeeper or use scanning apps to capture financial information. I also did not use companies that offer the ability to upload receipts, use bank account information, and recording of your hours to manage finances and billing.
As one starting out, it seemed better to deal entering the financial transactions myself. For example, when arranging for clients to reimburse me for travel, I would deal with it as I had when working for an employer in industry.
I would take all the full page sized printed receipts, e.g., for airline tickets, and the smaller receipts, which I would tape onto a blank page, and add the total costs for travel, transport, food and beverages, and scan them.
I would invoice based on the categories for travel reimbursement using QuickBooks and send the receipts as an attachment.
What are 10 popular apps for scanning receipts?
“I am prescribing a lot more apps than medications these days.”
Eric Topol
Many apps can scan receipts, but here are ten of the most popular ones:
1. Expensify
This app allows you to capture receipts, track time, and generate expense reports.
2. Shoeboxed
Shoeboxed lets you scan and organize receipts, business cards, and other important documents.
3. Neat
Neat is a scanner app that can capture receipts, business cards, and other documents, and export them to various accounting software.
4. Receipt Bank
Receipt Bank is a cloud-based platform that helps automate bookkeeping by extracting data from receipts, invoices, and bills.
5. Evernote Scannable
This app is designed to quickly scan and organize business cards and documents, including receipts.
6. CamScanner
CamScanner is a popular app that can scan and convert documents, including receipts, into PDFs.
7. Scanbot
Scanbot is an app that can scan and save receipts as PDFs, and it also has features like OCR (optical character recognition) and document organization.
8. Adobe Scan
Adobe Scan is a scanner app that uses OCR to convert receipts and documents into searchable PDFs.
9. TurboScan
TurboScan is a scanner app that can capture high-quality images of receipts and documents, and it also has features like automatic edge detection and perspective correction.
10. Smart Receipts
Smart Receipts is a mobile app that allows you to scan receipts and create expense reports on the go. It also has features like multi-page document scanning and CSV export.
Should you get a payroll service?
“You never want to be in a position where you can’t make payroll.”
Brian Acton
Unless your business structure, such as an S Corporation, requires it or you have employees, as an independent consultant, you may not need a payroll service.
My accountant’s company did the payroll initially, but eventually it was much less expensive to use a standalone payroll company. Examples of these are OnPay and Paychex. OnPay is less expensive for one employee, and has good customer service. Other services may be more cost effective for more employees.
You may not need a formal payroll service, but you do have to meet the tax requirements for each type of business structure. My company is an S corporation, so I was required to put myself on the company payroll. A payroll service helps you to meet your tax responsibilities.
My payroll company charged a low monthly rate per employee. The cost was the same per month regardless of whether the payroll was done every two weeks, every quarter or whenever.
I like to use a payroll service because the cost is lower than paying an accountant or a bookkeeper. You could do it yourself. Though, it can be complicated unless you work in or have qualifications or skills in the finance area.
What are the top 10 payroll services?
1. ADP
ADP is a leading provider of payroll and HR services for businesses of all sizes, offering a variety of payroll plans to fit different needs.
2. Gusto
Gusto offers payroll services and HR management tools, with features like direct deposit, tax filing, and employee onboarding.
3. Paychex
Paychex provides payroll services and HR solutions for businesses of all sizes, with features like online payroll processing, tax filing, and employee benefits.
4. QuickBooks Payroll
QuickBooks Payroll offers payroll services with features like automated tax calculations, direct deposit, and employee self-service.
5. OnPay
OnPay provides payroll services and HR tools for small businesses, with features like tax filing, time tracking, and automated payroll processing.
6. Square Payroll
Square Payroll is a payroll service designed for small businesses, offering features like direct deposit, tax filing, and employee benefits.
7. Wagepoint
Wagepoint provides payroll services for small businesses, with features like automatic payroll processing, tax filing, and employee self-service.
8. Zenefits
Zenefits offers payroll services and HR tools, with features like onboarding, benefits administration, and time and attendance tracking.
9. Patriot Software
Patriot Software offers payroll services and HR tools for small businesses, with features like direct deposit, tax filing, and time and attendance tracking.
10. SurePayroll
SurePayroll provides payroll services for small businesses, with features like automated payroll processing, tax filing, and employee self-service.
Choose your payroll service wisely
Each of these payroll services may have different pricing plans, features, and limitations. Do your research and choose the service that best fits the needs and budget of your business.
How do you invoice your clients?
What you invoice will depend on how you prefer to charge for your services and the contract you negotiate for your services. You have many options for invoicing your clients. These include a simple letter specifying the charges, and invoices generated from time tracking software or accounting apps.
If you charge by the hour, make sure you track your time
You could use an online service or apps that would also allow you to enter your time as you go along. In my case, I decided to track the time on my calendar, enter it into my desktop accounting software, QuickBooks, and invoice my clients myself.
My bootstrapping approach to time tracking
Read MoreSome of my pricing was at a fixed rate and did not require tracking time.
What are the top 10 apps for tracking time for billing purposes?
Here are they are:
1. Toggl
Toggl is a popular time tracking app that is used by freelancers and businesses alike. It is available for Windows, Mac, and mobile devices.
2. Harvest
Harvest is another popular time tracking app that also offers invoicing and expense tracking features. It is available for Windows, Mac, and mobile devices.
3. TimeCamp
TimeCamp is a time tracking app that provides a range of features, including invoicing, project management, and reporting. It is available for Windows, Mac, and mobile devices.
4. Clockify
Clockify is a free time tracking app that allows you to track time on projects and tasks. It is available for Windows, Mac, and mobile devices.
5. Hubstaff
Hubstaff is a time tracking app that provides a range of features, including GPS tracking, invoicing, and project management. It is available for Windows, Mac, and mobile devices.
6. RescueTime
RescueTime is a time tracking app that helps you to stay productive by monitoring how you spend your time. It is available for Windows, Mac, and mobile devices.
7. MyHours
MyHours is a time tracking app that offers invoicing, project management, and reporting features. It is available for Windows, Mac, and mobile devices. They have a free version “For individuals or teams just getting started with time tracking” and a paid Pro version.
8. TimeDoctor
TimeDoctor is a time tracking app that also provides employee monitoring features. It is available for Windows, Mac, and mobile devices.
9. Everhour
Everhour is a time tracking app that integrates with project management tools such as Asana, Trello, and Basecamp. It is available for Windows, Mac, and mobile devices. They have a free plan and other pricing tiers depending on the number of users and complexity of services offered.
10. Paymo
Paymo is a time tracking app that offers project management, invoicing, and reporting features. It is available for Windows, Mac, and mobile devices. They have a free version for personal use and versions for work.
Send an email or letter with your invoice
With the invoice, I would send an email mentioning what the invoice was for, e.g., consulting services for the month, and thank my clients for their business. I have always sent my invoices as an email attachment.
For billing by email, here is an example:
Dear <Accounts Payable and/or contact person>,
Attached is <insert: your organization name’s> Invoice # <insert: Invoice number> for consulting services rendered during <insert: month year>.
Thank you for your business, which is greatly appreciated.
Best wishes (Yours/Sincerely/your preferred ending)
<Insert: Your Name)
<Insert: your contact information>
Of course, if you are using fixed cost billing, you should mention in your correspondence what milestone or project has been completed.
By all means copy and paste this into your email and modify it as it suits you.
If you send a snail mail invoice and letter, then it is good use your own letterhead with a logo at the top and your address at the bottom of the letter. Date and sign your letter and put your title and organization under your signature.
Backup your financial records
With desktop accounting software, I found out the hard way that you must back up your files every time on storage off your computer. It’s fine to back up your files locally, but it is generally better to back them up online. You can back up your desktop accounting files online on Google drive or Microsoft One drive, or another cloud storage to preserve records of the money flowing through your consulting business.
Now you should go with online accounting software, which is the most efficient. Your finances can be backed up as you work. If you can get a desktop application, you will likely be saving money by the third year. Unfortunately, desktop applications are headed for extinction.
New accounting apps are almost exclusively online. Some are still free, but many are heading toward paid subscription services.
Many less labor intensive options are available for tracking and managing your finances
As you can see, my initial method was very hands-on. It worked well for me, was low cost, and relatively low tech, but was not very efficient.
Technology has advanced considerably and it is possible now to scan receipts using your mobile phone, import them into accounting apps, and to do everything online. Also, as we have seen, apps can track your time. The data can be used directly to populate your accounting app and produce invoices.
You can pay someone to do almost everything financial. How much you do yourself will depend on how much you are earning and how comfortable you feel about dealing with your finances.
Of course, how you charge for your services has a big effect on your billing.
If you have a fixed cost for a project, you don’t have to track hours.
If you are on a retainer without an escape clause for excessive time, your billing amount would be fixed.
Not having to track time would greatly decrease the effort required for billing.
For complex projects where the time required varies greatly every month, it would be better to charge on an hourly basis.
What about taxes?
“If you get up early, work late, and pay your taxes, you will get ahead – if you strike oil”
J. Paul Getty
You can use an accountant, bookkeeper, a tax service, or do it yourself. I relied on my accountant.
Whoever manages your taxes or finances, it is best to have your own accounting software or app so that you can follow the money in your consulting business. Accounting apps help you to understand how your business is doing and that is crucial. When you become more familiar with your finances, it will be easier to develop tax strategies.
Someone else can keep your books up to date and do your taxes, but you should know how your business is doing financially. You should clearly understand the money coming in and the money going out. Also, you should understand your tax liabilities, and this is where professional help is important.
Plan your finances carefully, especially if your monthly income varies substantially. For example, if you start out with three good months of income, it’s better not to assume that it is the rate that you will earn at over the rest of the year.
Don’t spend too much, find yourself in the red, and lack the money at the end of the year to pay your taxes or other expenses. You can increase your spending at the end of the year when you know where you stand.
If you are on a payroll, you should be paying payroll taxes. You should work with a tax advisor before it is too late in the year to make any adjustments that would help you to avoid adverse tax consequences.
Final thoughts
“Know your numbers’ is a fundamental precept of business.”
Bill Gates
If you don’t know the financial state of your business, you don’t know your business.
In the beginning, try to avoid any financial commitments that are not absolutely necessary. I have addressed my experience, where I used a hands-on, bootstrapping approach in my own business. While the landscape of possible available financial apps is extensive, try to use whatever is free initially.
An increasing number of integrated financial solutions are available for tracking your finances more easily and much more efficiently than the method I used when I started out.
It is essential to get good financial advice, especially from an accountant, and to make sure that you understand your tax responsibilities.
I hope that this was useful to you.
Let me know your thoughts!
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