As a freelancer, it is easy to spend money on products or services as you start your business, but not track those expenses. Keeping track of your expenses is extremely important for various reasons, but here are five of the most important reasons.
Accurate Accounting
This might be the most important reason as taxes can be complicated for most freelancers, even when finances are tracked correctly. There are two different types of income that we will bring up in this blog, Net income, or the amount of money that a business or an individual has left over after subtracting all of their expenses from their total revenue; and taxable income, the income that remains after deducting all of the eligible business expenses from the business's total revenue. By tracking expenses, freelancers can reduce their taxable income and save money on taxes.
Budgeting
As freelancers, especially those just starting out, we all know that budgets can be tight at times. Keeping track of expenses helps to budget more effectively. By knowing what you’re spending and how much you’re spending, you can plan ahead and make informed decisions about your budget.
Cost Control
Continuing from budgeting, there are two ways for a freelancer to make money. First, generating more business, and second, reducing your expenses. Both ways put more money in your pocket. Tracking your expenses can identify areas where you are overspending or misspending allowing you to cut unnecessary costs.
Reimbursement
You might have business-related expenses like travel that need to be reimbursed by your clients. The only way to accurately recoup those costs is to track your expenses are request reimbursements from your client. Usually, clients will request proof of the expenses for reimbursements, which you will be able to show through your tracked expenses.
Tax Deductions
Many expenses such as home office expenses and office supplies incurred by freelancers can be deducted from their taxable income. By keeping track of these expenses, freelancers can ensure that they take advantage of all the deductions they are entitled to and minimize their taxable income.
Overall, keeping track of expenses is a crucial part of managing a successful freelance business. It helps to ensure accurate accounting, effective budgeting, cost control, reimbursement, and maximizing tax deductions.