The money you spend is just as important as the money you earn. Set up an expense budget for your business to bring purpose and discipline to your spending. Track every penny; make adjustments as needed; and stay profitable. It feels good to be in control.
There's nothing quite like receiving a large payment from a client for a job well done. You can almost hear the "cha-ching!" as your bank account grows and you become one step closer to achieving your financial goals.
But the truth is the amount of money coming in is somewhat meaningless if there isn't a plan in place for how that money is ultimately utilized or spent. Failing to control expenses is why so many businesses struggle to stay profitable, even when making what appears to be plenty of revenue.
The goal of Rule #4 is to keep your business profitable. From budgeting to taxes, we'll be covering some important topics to help you keep control of your expenses and showing you along the way how Harpoon is the perfect partner to keep you accountable.
A budget is a proven tool that has helped countless families and individuals eliminate debt and build wealth. Maybe you already have experience with the benefits of a budget in your personal life. Having an expense budget for your business is just as important and can provide the same benefits.
In simplest terms an expense budget compares what your business actually spends to what you planned on spending. Your budget is both your plan and your accountability partner. If you never plan the amount of money your business needs to spend, then you'll never truly have control over the amount of money your business gets to keep.
Your budget is both your spending plan and your accountability partner.
One of the first things we encourage you to do with your Harpoon account is to set up an expense budget for your business. Using Harpoon's Budgeting tool you'll not only have a clear plan for your business's spending, but an easy way to track your spending habits against that plan from month to month. Harpoon will even send you alerts when you're close to maxing out your budget.
Creating your budget starts with documenting the various expenses your business plans to incur throughout the year, and then determining the average monthly costs of those expenses. The good news is, if you've already calculated your yearly revenue goal in Rule #1, then you've already done most of the work required to build your business budget. Remember those business categories and their calculated monthly costs? You can now add those categories and costs to your expense Budget in Harpoon. Everything from advertising and office supplies to insurance and office rent should be accounted for in your budget.
Tip: It's always a good idea to have an emergency fund set aside for both you and your business. This fund should cover 3 to 6 months of expenses. In other words, your business could fail to bring in revenue for 3 to 6 months and you'd have the cash reserves to continue paying your personal and business expenses during that time.
As the days of the month roll on and you're tracking your expenses in Harpoon (which we'll cover in detail in just a moment), check in on your Budget a few times a week. See if your actual spending is within the limits of what you've planned. Look back in time to see if there are any categories in which you're consistently overspending. Maybe you need to increase your budget amount for that category. Or maybe you need to be more disciplined with your spending. You might even notice you're consistently underspending in a category and can afford to lower its budget amount.
Note: Ultimately your budget isn't meant to be an overly legalistic burden. Instead it's a tool to help you plan a ballpark, monthly amount of spending required for your business, with the ability to monitor your success (or failure) of sticking to that plan. Then it's up to you to adjust your plan or behavior accordingly.
A budget isn't very useful if you're not actually tracking your spending. And Harpoon is the perfect place for you to track every expense your business incurs. Harpoon's Expense tool makes it easy to record, filter, manage, and generate reports of your business expenses.
And besides budgeting benefits, tracking your business expenses can also provide you a healthy tax deduction, which means the cost of the expenses can be deducted (in whole or in part) from your business's income before being taxed.
What kinds of expenses are considered legitimate, deductible business expenses? In the United States, the IRS considers any expense that is both "ordinary and necessary" a deductible expense. This means the expense is "common & accepted" and "helpful & appropriate" for your business. This is fairly vague on the surface, but you can dig into more details by reading Publication 535 from the IRS.
Note: Harpoon provides a default list of categories for you to use when recording your expenses. This list is based on the high level categories mentioned by the IRS here in the United States, but you're free to customize these categories to better fit with the tax laws in your country if needed.
If you're new to the world of self-employment, you might be surprised at how many of your expenses are tax deductible. Here's a short list of deductions you might be missing out on:
And the list goes on. The important thing is that you're recording these expenses throughout the year in a product like Harpoon, so that reporting these expenses is easy to do come tax time.
Tip: Use a separate bank account for all of your business transactions, for both expenses and deposits. Besides legal and tax reasons, separating business from personal activity simplifies the financial management of your business.
Chances are, you drive your vehicle for business purposes throughout the year. Maybe just a little. Or maybe a lot. Whether it's visiting a client for a project kickoff meeting or changing office locations during the day, the business mileage you put on your vehicle should be tracked and recorded. Otherwise you could be missing out on a healthy tax deduction.
In the United States, there are two options the government makes available for deducting your vehicle expenses: by using the standard mileage rate or by deducting the actual expenses incurred.
Standard Mileage Rate: With this option you simply record the number of miles you drive your vehicle for business purposes throughout the year, and the government will reimburse you a set amount per mile. For example, if Nathan drove his vehicle 1,000 miles for business purposes in 2016 the government would reimburse him $0.54 per mile for a total reimbursement of $540.
Actual Expenses: This option is a bit more complex, as you need to keep track of the actual expenses for your vehicle (e.g. maintenance, fuel, repairs, etc.), and then a portion of those costs can be deducted.
Your accountant can help you decide which option is best for you. If you opt for the standard mileage rate, then you can use Harpoon's Mileage tracking system to keep easy records of all the miles/kilometers put on your vehicle(s) for business purposes. This would include travel for business meetings, business meals and entertainment, visiting clients, business errands, moving between temporary office locations, etc.
Track the business mileage you put on your vehicle and receive a healthy tax deduction.
But be careful that you're not recording mileage that's not considered legitimate business travel. For example, the IRS here in the United States doesn't consider commuting from your home to an office as legitimate business travel unless that office is a temporary work location you plan to work at for less than one year. It can get tricky. Just be sure you're including good notes with your mileage records and consulting with your accountant along the way. And you can always dig into more details by reading Publication 463 from the IRS.
Note: Harpoon provides a default list of categories for you to use when recording your mileage. This list is based on the high level categories mentioned by the IRS here in the United States, but you're free to customize these categories to better fit with the tax laws in your country if needed.
Harpoon as a product won't do your taxes for you. But since you've been tracking all of your income, expenses, and mileage in Harpoon, we provide all the necessary reports your accountant needs come tax time.
Tip: When it comes to filing taxes we strongly recommend hiring a professional, certified public accountant (CPA). There are so many nuances of our ever-changing tax laws, and the benefits of a good accountant far outweigh the costs to hire one, and that's true for freelancers as well.
If you don't yet have a trusted accountant, start by asking your peers who they use and trust. Some accountants cater to certain industries. So if you run a web design studio, try asking other studios which accountants they recommend. And don't limit your search to local professionals only. As long as your accountant is accessible for questions and advice, what's most important is their quality of work, attention to detail, and understanding of your industry.
One of the details a good accountant can advise you on, is picking a business structure. In the United States, the most common business structures are sole proprietorships, partnerships, corporations, LLCs, and S corporations. If you run your business outside of the U.S., check with your accountant to see what options are available to you. The structure you pick determines the tax forms your accountant will use to file your taxes as well as how your income is actually taxed.
The U.S. government actually has some fairly "user-friendly" resources to help you understand the pros and cons of the different business structures available. So instead of rehashing what they've already written, we recommend going straight to the source. First check out the Choose Your Business Structure section of the U.S. Small Business Association site. Then you can also read the IRS publication on Business Structures. After you're familiar with your options, schedule an appointment with your accountant to discuss which structure is best for your business.
In the United States, there are a couple of forms you should be aware of when doing business with clients who pay you over $600 during a given tax year:
W-9 Form: This is a form you're responsible to send to your client(s) to document your taxpayer ID number (which is either your social security number or employee ID number, depending on your business structure). You can download the W-9 form from the IRS.
1099-MISC Form: After your client has your W-9 form, they will send you a 1099-MISC form which documents the amount of money they've paid you during the given tax year. They will also send a copy of this form to the government. You don't need to do anything with your copy other than file it away for historical documentation.
The purpose of these forms in the government's eyes, is to make sure the amount of money your clients say they paid you lines up with the amount of income you're reporting on your own tax return. So unless you like paying fines, you'll want to make sure your reported income matches up to these 1099-MISC forms the government is receiving from your clients.
If your reported income is greater than the total 1099-MISC amounts, that's probably because you've received income from clients that have paid you less than $600 (in which a 1099-MISC form wasn't necessary), or maybe a client has failed to fill out a form, in which case you should remind them.
When it's time to file taxes, your accountant will need certain financial information about your business. If you've been faithful to track your income, expenses, and mileage in Harpoon, the reports your accountant needs are only a click away.
Profit & Loss Report: This report compares all of your business's revenue to your business's expenses for a specific period of time and calculates the resulting net profit or loss for your business.
Expense Report: This report provides a line item documentation of your recorded expenses with totals for each expense category for a specific period of time. This report might be overkill for tax purposes, as the Profit & Loss report actually includes an expense breakdown by category. But if your accountant appreciates more details, this report comes in handy.
Mileage Report: This report documents the business miles/kilometers you've recorded for your vehicle(s) for a specific period of time. If you're using the Standard Mileage Rate method of deducting vehicle expenses (see above), this is the report your accountant will need.
Tax Summary Report: This report provides a summary of the taxes you've collected from your clients on your invoices, along with the taxes you've paid as part of your business expenses. In some countries, this report is necessary to document and/or be properly reimbursed for taxes like VAT, GST, etc.
Taxes aren't the most exciting part of running a business, but as long as you're faithful to track your income, expenses, and mileage in Harpoon, these reports should provide your accountant with the necessary financial information needed to file your taxes accurately.
You've come to the end of Rule #4 of The Harpoon Method, so "what's next" is that your work is now cut out for you! To recap this series, we've covered:
Rule #1 - Set a Financial Goal: You've come up with one of the most valuable pieces of data you can ever have for your business—a meaningful, yearly revenue goal. This goal is based on your real life wants and needs. You're now allowing your long-term vision to direct your short-term decisions.
Rule #2 - Plan Your Revenue: You've learned how to work backwards from your yearly revenue goal by breaking up your year into manageable, bite-sized pieces. You know how to plan out how much revenue your business needs to bring in each month and how to schedule your projects accordingly. When you plan your future, you own your future.
Rule #3 - Bill Your Clients Intelligently: You've learned some of the most popular pricing and billing strategies and have picked a combination of strategies that complement the services you provide. Invoicing can now be a joyful, stress-free process for both you and your clients.
Rule #4 - Control Your Expenses: The money you spend is just as important as the money you earn. You've learned how to set up an expense budget for your business, tracking every penny and making adjustments as needed, all with the goal of staying profitable. It feels good to be in control.
These four rules, combined with Harpoon's software, empower you to take total control of your time, billing, and expenses, and put you in charge of accomplishing your financial goals.
From the entire team at Harpoon, we'd like to congratulate you for taking responsibility of your own financial success!
Disclaimer: Harpoon and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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