• renaissancer

How to set up your consulting business to deal with money

Updated: Nov 12, 2021

It's a business! One way or another you have to keep track of your finances.

First the basics

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.

In previous posts and on the web pages on my website, I have written about registering your business, and some aspects of establishing your finances such as 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.

First I tried free accounting software, but I found it was not adequate. I had no accounting or bookkeeping experience, and I needed more help than was available.

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, but who preferred teaching how to use QuickBooks and doing bookkeeping to the general accounting side of her business.

She came over and in 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 and had set up my own version. The chart of accounts is how you categorize the money coming into and out of your 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.

Should you hire a bookkeeper?

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, and 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 with 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 and send the receipts as an attachment.

Next, get the services of an accountant

To me it seemed easier online to identify a suitable lawyer than an accountant. I found an accountant by asking other people in my area who had their own consulting businesses, if they could recommend someone. My accountant was expert in taxes. He said that his company did not do usually do payroll, but he could have his junior staff and assistants take care of it.

Should you get a payroll service?

My accountant's company did the payroll, but eventually I found that 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, but Quickbooks or other services may be more cost effective at the low end for more employees.

My company is an S corporation, so I was required to put myself on the company payroll. You may not need a formal payroll service, but you do have to meet the tax requirements for each type of business structure. I found that my payroll company charged a low monthly rate per employee and the cost was the same per month for the service regardless of whether the payroll is done every two weeks, every quarter or whenever.

I like the payroll service because the cost is lower than paying an accountant or a bookkeeper. You could do it yourself, but it can be complicated unless you work in or have qualifications or skills in the finance area.

How do you invoice your clients?

You could use an online service 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 and invoice my clients myself using my desktop accounting software, QuickBooks.

I established three calendars. The first was my general calendar for every commitment. It was blue. The second calendar was for billable time. It was red. If I had a meeting and attended it, I would create an event on my calendar covering the time that I attended the meeting. If I reviewed a document or corresponded by email, I would enter the time as a red calendar item. The third calendar was green and was for overhead. The overhead was for things like working on my billing but also for items I had done but where I had decided not to charge my client.

All calendars were displayed at the same time, which allowed me to see my appointments (blue), billable time (red), and overhead (green) at a glance. In contracts with my clients, I specified that I would bill in 15 minute increments. I did this on Google's G Suite and later on Microsoft.

Sometimes I had a contract on retainer, which meant that I was paid a fixed amount for my services each month. I had an escape clause in my contracts that if the amount of billable hours exceeded the monthly retainer amount by a certain percentage, for example, 10%, I would bill for all hours. With that arrangement it was still good to track hours closely.

When the time came for invoicing my clients, I would copy items for each day from my red calendar and paste them directly into my QuickBooks invoice page. I also cross-checked time charged against my call times on my mobile phone and email records. All this additional cross-checking is time consuming and not necessary. It was my personal preference.

With the invoice, I would send a letter mentioning what the invoice was for, e.g., consulting services for the month, and thank my clients for their business.

With desktop accounting software, you can back up your files online on Google G Suite or Microsoft One drive, or another cloud storage. You could go with online accounting software, which is the most efficient. If you get a desktop application, you will likely be saving money by the third year.

As you can see, my 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 phone, import them into accounting apps, and to do everything online.

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 do the project and 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. This would greatly decrease the effort required for billing. The problem is if you work on complex projects where the time required varies greatly every month, it would be better to work on an hourly basis.

What about taxes?

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 your finances. Accounting apps help you to understand how your business is doing and that is crucial. You can have someone else keep your books up to date, but you should know how your business is doing financially. You should clearly understand the money coming in and the money going out. You should also understand your tax liabilities, and this is where professional help is important.

You should 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. You should not put yourself in the situation that you have spent too much, find yourself in the red, and don't have 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.

I have mentioned accounting software or applications a number of times. I won't address these in detail here. 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. It is best to look at the many reviews and comparisons for small business accounting apps online.

Final thoughts

If you don't know the financial state of your business, you don't know your business. I have addressed my experience, where I used a hands-on, bootstrapping approach in my own business. 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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