Being your own boss can be liberating and terrifying at the same time. You set your own hours, decide your path and keep what you earn. You are also responsible for finding new work, building relationships and you aren’t paid unless you work. An irregular pay schedule is one of the many reasons entrepreneurs don’t keep track of finances year round. But there are very good reasons why you should be keeping track.
Understand Your Income
It’s crucial you have a good sense of how well your business is doing financially. Human beings have a recency bias that impacts every aspect of our daily lives. Book a big piece of business last week? You’ll think your business is doing great! Haven’t completed a big project or received a check recently? The business is flailing!
If you keep track of your finances on a month to month basis, you’ll have a more accurate understanding of the health of your finances, and you’ll have a lot more confidence in your business’s performance.
Know Your Expenses
It’s important to track your expenses throughout the year because your expenses eat away at your ammunition (income). You work hard to get income or billable hours, regardless of your profession, and you don’t want to let those dollars exit the business without a very good reason.
Every expense should be viewed as an investment, and your investments need to have a positive return. Don’t fall into the trap of paying for the hallmarks of entrepreneurship if they don’t further your business goals. It’s easy to buy business cards and print t-shirts, but are they representing a good investment? Shiny new equipment feels good, but will it bring in more business?
Alternatively, if you find yourself spending a lot of time doing non-revenue tasks, could you invest in additional help? If you understand your business income and expenses, you’ll know where you stand and if you can invest more in your business for better outcomes.
You’ll Figure Out Quarterly Estimated Taxes More Accurately
When you get paid a regular salary, your income taxes are deducted automatically. When you’re self-employed and earning income from a variety of sources, you still need to pay those taxes, even though they aren’t automatically withheld. You pay them by making quarterly estimated tax payments. You must do this if you tax liability is $1,000 or more for the year.
Typically, you can determine your quarterly estimated tax payments based on the previous tax year. If you pay within 90% of your actual tax or over 110% of your previous year’s tax, you fall into a safe harbor category and will not be subject to underpayment penalties.
By tracking your income and expense throughout the year, you can determine how much profit you actually have in a given quarter. You can then use that to calculate your estimated tax owed rather than relying on the safe harbor amount, which could be higher than necessary.
Don’t worry about tracking your finances year-round. You can use QuickBooks Self-Employed to easily track your income and expenses, business mileage, and capture receipts so that you can save money for your business and you can easily estimate your quarterly estimated taxes.