Accounting best practices when starting out as a professional services contractor
Starting out as a professional services contractor is an exciting time. Whether you are in IT, medicine, engineering, law or something more creative, contracting provides a unique set of opportunities and challenges. And whether your goal is to just have enough work for yourself, or build a future agency, getting your accounting right from the get-go will be key to the success of your business, enabling you to make financially sound decisions based on real-time data.
Managed properly, accounting software allows you to keep a finger on the pulse when you set budgets, monitor your business expenses, and identify the best opportunities for growth. Perhaps most importantly, having the right systems in place keeps you out of trouble with the IRD.
We look at six accounting best practices when you are starting out as a professional services contractor.
Separate your business and personal finances
One of the most common errors in the early stages of business is to mix business and personal finances. Keeping them separate helps to improve cash flow, tax filing and financial forecasting. Opening a separate account for your business will ensure all your business finances are transparent.
In New Zealand it is a good idea to have an NZBN (New Zealand Business Number). This does not mean you need to register as a company. In fact it’s a common misconception that freelancers and contractors need to register a limited company in order to operate.
Keep accurate time records
To have proper control of your business you must keep accurate records of earnings and expenses. As a professional service provider you should keep a record of time spent on billable work and time spent preparing quotes, networking, managing any contractors and other non-billable work. Additionally if you have contractors working on projects, it’s important to understand their progress against the quoted hours for the job.
Accurately tracking your time allows you to monitor your business growth, provide accurate quotes, track project progress and even profitability.
Stay on top of invoicing and expenses
To maintain a healthy cash flow you need to stay on top of your invoicing and expenses. A common challenge for small businesses is keeping track of invoices, and more specifically unpaid invoices. Courteous clients will provide quick payment, but unfortunately fair and steady returns are not a guarantee. Be polite and assertive when invoicing and send them as soon as possible after a job is complete, or monthly as appropriate. Set a reminder to check payment has been made and have a standard follow up procedure if it hasn’t.
Monitor your business expenses closely. Keep receipts and categorise expenses properly. This will help you identify areas for potential cost savings and ensure you claim all the appropriate tax deductions.
Accounting software, like Xero, can help you stay on top of invoicing and expenses and can even integrate with your time recording software, ensuring timely, efficient and accurate invoicing.
Understand your financial obligations
As a contractor or freelancer you need to understand your obligations for income tax, ACC and GST. You should set aside funds for tax payments and consider consulting with a tax professional to ensure compliance and maximise tax deductions.
It’s handy to keep the money in a separate account so you don’t spend it by mistake! Make sure you don’t miss important deadlines – staying on top of GST returns and paying provisional tax is especially important in New Zealand. Depending on your personal situation, we often recommend the Accounting Income Method for provisional tax to ensure that you pay the right amount of income tax at the right time and do not get behind.
Monitor your budget
Develop a budget for your business to manage cash flow and make informed financial decisions. Keep track of important business metrics, such as billable hours, client acquisition cost, revenue per client. Monitoring your budget and key performance indicators will help you to gauge your business’s health and make data-driven decisions.
Consider hiring accounting experts
As a professional contractor you already know how important it is to employ the right expertise for your business. If accounting and taxes are not something you specialise in, consider hiring an expert. They can offer valuable advice and ensure accuracy in your financial reporting. A knowledgeable professional can provide a variety of services that can ensure your business’s health in the longer term.
At The Accounting Hub we have experience working with a number of businesses offering professional services, such as design agencies, engineering & IT firms, energy consultancies, medical and law practices. We are able to provide comprehensive accounting advice to help you manage all the financial aspects of your business. If you would like some help or advice, please get in touch.