When you’re a freelancer, it’s easy to get so lost in the pursuit of making money that you neglect your finance documents.
Yes, believe it or not, anyone earning money for services or products needs certain finance documents, even freelancers.
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While you’re focusing on surviving the market, trying to find new clients, making sure they pay you on time and increasing your brand, you now find out you have yet another job. Keeping your finances in order.
That doesn’t mean just paying your bills. That means knowing exactly what the financial situation of your freelance business is. Because if you think what you’re doing is not a business, you’re in for a surprise when tax time rolls around.
Beyond that, these finance documents will help you keep a watchful eye on your financial situation to take your business to the next level. They will help you determine whether your goods and services are priced accurately, identify your margins, and help with your cash flow.
We’ve already talked about the importance of tracking your expenses, so today we’ll focus on your finance documents. Although there are many that are important and beneficial to have, we’re going to list the four most important finance documents for your freelance business.
Profit & Loss Statement
This helps you to realize whether your business is making money or bleeding it. It’s impossible to determine that just from memory alone and the occasional glance at your bank account.
Also known as the P&L or income statement, this document allows you to review your income and expenses. It usually covers anything from a few months to a full year. This period is up to you to determine.
Your income statement will have two parts: revenue and expenses.
- operating revenue from goods and services sold
- non-operating revenue, such as rent money received for subleasing, interest on loans, etc.
- gains on long-term asset sales. These sales can be a building, a vehicle or other, and refers to the price sold which was in excess of the value of the asset.
- operating expenses, such as payroll, overhead such as rent, utilities, etc., and marketing costs
- non-operating expenses, such as interest payments on loans, debt, etc.
- losses from asset sales and lawsuit damages. This is the opposite of gains on long-term asset sales, as the amount of losses here have to be lower than the value of the asset.
For the most part, freelancer revenue will only include operating revenue, and the expenses will probably just span operating expenses (and perhaps non-operating expenses if you’ve taken a loan for your business).
These are important terms to remember when creating your income statement. To make your life a little bit easier, we’ve created a free Profit & Loss Statement that you can download here.
Your balance sheet gives a nice snapshot of your business at any time. Many businesses do it at the end of the year, but it can be at any time of your choosing.
Pretty much, a balance sheet comes down to the following equation:
Liabilities + Owner’s Equity = Assets
The equation should be balanced, meaning your assets should be equal to your liabilities and owner’s equity.
Your assets include:
- current assets, which is cash or anything that can be converted to cash within the time frame of a year
- fixed assets, such as equipment, land, furniture, machinery and other things you’re not planning on selling
For liabilities, there are:
- short-term liabilities, which are things such as taxes and accounts payable
- long-term debt, which are things such as loans from the bank
Mathematically, liabilities = assets – owner’s equity
Your owner’s equity includes any money you’ve invested in the business – the money you’ve withdrawn + net income since the business began.
Mathematically, owner’s equity = assets – liabilities
Again, we’ve got your back, and have created a balance sheet here that you can download to help you get started.
Cash Flow Statement
This is perhaps the easiest of the finance documents to understand, because it basically is a measurement of how much cash is flowing into and out of your business. This document is important because it helps you to understand trends in your cash management and helps to keep your business solvent (meaning you can meet your financial obligations). It can be calculated as often as necessary, but usually monthly or even quarterly.
Your cash flow includes:
- cash inflows, such as cash sales, loans, and other investments
- cash outflows, such as expenses you’ve paid, equipment you’ve bought, and other payments
It is mathematically quite simple to calculate your ending cash balance:
Ending cash balance = beginning cash balance + cash inflows – cash outflows
This means that, if you’ve had a cash balance of $375 at the beginning of the month, earned $425 and spent $650, your ending cash balance would be $150.
We’ve got you covered with calculating your cash flow. Download our cash flow statement template here.
Although this isn’t usually included in important finance documents for businesses, it is crucial for freelancers.
Invoices are the finance documents you use to make sure you get paid for your goods and services. They are the tools you need to get your money. They are also a record of your financial activity and a legally binding document once both parties have signed and agreed.
Invoices act as culturally acceptable versions of “You owe me money. Give me money.” You can’t exactly write that in an email and send it to your customers as, for one, it might come off as rude, and two, it doesn’t detail what the payment request is for.
Invoices list your goods and services utilized or purchased by your customer. They can also include many other things, such as payment terms for when the customer should provide your payment.
Invoices are crucial for your cash flow, and often lapses in getting your invoices paid can be the difference between positive cash flow and negative cash flow.
We’ve got quite a lot of invoice templates for you to download in different formats (such as Word, Excel, OpenOffice, InDesign, PDF, Photoshop and GIMP). But we’ve also got a few reasons why online invoicing software is better than just using invoice templates over and over again. In order to properly manage your finances and keep track of your expenses, you’ll need a good, easy system in place and InvoiceBerry’s software meets that mark.
Get your finance documents in order
In order to really succeed as a business person (yes, freelancer, you are a business person), you’ll really need to take charge of your finances.
In order to take charge of your finances, you’ll need these four crucial finance documents as a basis. There are many others, as I’ve said before, that would be helpful for your business, but these are a great starting point.