Why Freelancers and Creative Agencies Need an Accountant
Many freelancers and small creative agencies question whether they need an accountant. An accountant may seem like just another expense.
When you’re starting, you may not need an accountant. If you’re comfortable with numbers, you could do your own basic bookkeeping. Be sure to pay expenses and taxes along the way, and then hire someone to do your year-end taxes.
But first, let’s talk about basic money questions for freelancers and creative agencies. Then we’ll see where accountants can add value.
Your Financial Life in Seven Questions
Whether you’re a solo freelancer or a small agency owner, there are seven basic money questions. Each has sub-questions, and this is where you benefit most from an accountant.
Here are the basic money questions:
How much are you billing?
What are your business expenses?
Which expenses can you write off?
Which taxes do you have to charge?
When do you have to pay those taxes?
How much are you keeping after taxes and expenses?
How much are you saving?
How Much Are You Billing?
Answering this question is easy—total your invoices over a period of time. But beyond that, there are more questions that may cause you to think.
Could you be billing more if you had more business, or is your time maxed out?
If you’ve maxed out your time, how can you increase your billing?
If you do different kinds of work, is some of it more profitable than others? Can you charge more for certain types of work? I wrote about how freelancers can charge more here.
Is your bookkeeping system set up to track different types of projects? Can you see which projects are most profitable?
These are questions an accountant can help you answer.
What Are Your Business Expenses?
For many freelancers working out of their homes, basic business expenses are minimal.
All you need are a computer, phone, software, and internet service. Depending on your type of work, you may add a camera and photo equipment.
But even if you work at home, you have other expenses that you can attribute to your work. These include the costs of your workspace and perhaps, travel/transportation.
Here’s where an accountant is valuable. If you work at home, can you write off some of your rent/mortgage, utilities, cable TV service? In most jurisdictions, the answer is yes, but you need to understand the rules.
(For example, where I live in Toronto, Canada, you can only write off a part of your rent/mortgage if you have a defined office. You can’t if you work at the dining room table. That may be different where you live.)
If you buy a new computer or office chair, you need to know the depreciation schedule for your taxes. Likely, you won’t be able to write off the total in the year you buy it.
An accountant makes sure you claim all reasonable expenses and track them in your bookkeeping software.
Which Expenses Can You Write Off?
Many write-offs are obvious, but you may be missing the non-obvious ones.
For example, if you’re a filmmaker, can you write off Netflix and movie tickets? Likely yes. It’s research. Can a copywriter write off any book or magazine purchase? Yes, again. Art gallery tickets? Concerts?
An accountant can tell you what will be accepted according to your work and tax laws where you live.
Which Taxes Do You Have to Charge?
This is where you need expert advice. You need to know from day one which taxes you’re obligated to charge and remit.
This varies by country, region, and sometimes by city.
If you do business without charging appropriate taxes, you may be liable for paying them (even though you didn’t charge or collect them). There may also be a penalty on top of that.
Whether or not you hire an accountant, you must understand and adhere to the tax code in your location.
When Do You Have to Pay Those Taxes?
It’s critically important to know when taxes are due.
To give you an idea of the potential complexity, where I live, you have to charge and remit a sales tax monthly, quarterly, or annually, depending on the amount of your overall billing.
If you bill under $30,000, you don’t charge the tax at all.
If you bill someone out of province, part of the tax doesn’t apply. If you’re paying a sub-contractor and including their fee into your client billing, they shouldn’t charge you the tax since you’re collecting the tax when you bill the client.
Trust me, you want expert tax advice for your business.
How Much Are You Keeping After Taxes and Expenses?
As you run your company, you’ll have a general idea of whether it’s profitable. Can you pay your bills? Are you personally making enough money from your company? Are you saving money for your financial cushion?
Even if you answer yes to all those questions, you may still feel like there should be more money left over for you.
That’s where an accountant can be beneficial, especially if they have other clients like you.
An accountant can give you expected levels of profitability. Compared to other companies like yours, are you as profitable as you should be?
I remember one year-end meeting with our accountant. We’d had a pretty good year. However, our accountant noted that other similar companies were more profitable. They had more money left for bonuses and dividends.
That led to a discussion of where we were most profitable. What types of projects? Which clients? Where should we grow our business, and what should we drop?
Only with this perspective, and by going deep into our numbers, did we understand where we would find our best opportunities.
How Much Are You Saving?
You already know that your income is “lumpy” (unless all your clients are on retainer). Some months the money seems to roll in. Other months can be barren.
That’s why it’s important to save a cash cushion. But how much should it be?
If you search for answers, you’ll hear everything from three to six months’ expenses.
Again, reviewing your business with an accountant will give you a better idea of your ideal savings target.
Incorporate or Not: An Accountant Will Help with the Answer
You don’t have to incorporate. But you might find it very helpful to your business.
For example, with a company, you can declare dividends for yourself. Dividends are taxed at lower rates than salary. But there are other critical reasons to incorporate too.
I wrote about the reasons most freelancers should incorporate here.
An Accountant Should Make You Financially Literate
Many of us in the creative industry are “not good with numbers”. That’s why we didn’t become accountants.
In addition to doing your taxes and providing advice, an accountant can make you financially literate. You should understand at least a few critical numbers in your financial statements.
Three financial documents are periodically created for every company.
They are:
Income Statement (aka Profit and Loss, or P&L)
Balance Sheet
Cash Flow Statement
The Income Statement focuses on your revenue, expenses, gains, and losses. It includes the details of your sales and then works down to your net income. It tells you how much money you took in, what happened to it and how that compares to the previous period.
The Balance Sheet is a snapshot representing your company’s finances at a moment in time. It lists your assets, liabilities, and shareholders’ equity. It shows you what you own and what you owe on that date.
Think of your Balance Sheet as a summary of the detail shown in your Income Statement.
Reviewing a series of monthly Balance Sheets will show you what’s happening in your company. This is often the best indicator of how you’re doing.
The Cash Flow Statement tells you how much cash there was at the beginning of the statement, how much came in during the defined period, how much went out, and what’s left. It’s like a bank statement.
Your accountant’s job is to tell you which numbers deserve your attention on a regular basis. You should be able to review these statements and, in an instant, see whether you’re going to hit your targets.
How Do You Find a Good Accountant?
You want an accountant who has clients like your business. Your accountant should understand your business and its challenges.
I got my first accountant through a recommendation from a small agency owner. The accountant had many clients in the creative services business (and a few famous authors, hello Margaret Atwood and Michael Ondaatje!).
So, ask around. Talk to other freelancers or agency owners. Get in touch with your local graphic design or marketing association and ask for referrals.
Find one who can help you in a consulting and advisory capacity, rather than only doing your taxes once a year. You need to feel comfortable enough with them to discuss everything about your business. After all, they will know about every dollar/pound/Euro anyway.
If you don’t get that kind of advice or comfort from your current accountant, find another one.
How Much Do Accountants Charge?
The answer, of course, is it depends. Before you choose an accountant, ask them how they charge. This time, you’re the client, right?
Some may bundle services, while others charge by the hour. I was guided by the fact that my accountants had other clients like me. I assumed their fees would be reasonable for the services provided, and I was happy with them. But, it doesn’t hurt to ask—after all, your clients ask you about your fees.
Could You Get a Bookkeeper and Not an Accountant?
Yes, you could. But keep in mind that most bookkeepers will just make sure you have accurate records of your finances. They can also do your taxes. They may point out problems or opportunities, but they don’t usually provide much advice. It’s not their job.
When I was solo freelance, I did my own books and had an accountant.
When I started my first agency, our project manager did our books, and we had an accountant. As we grew and our project manager got too busy, we had a bookkeeper who came in once a week. She was recommended by our accountant, so we knew they would work well together.
We kept that same bookkeeper/accountant setup for our second agency. It worked for us.
Learn more about how an accountant can help your business grow in my book, How to Start a Successful Creative Agency. It’s the essential business guide for graphic designers, copywriters, filmmakers, photographers, and programmers.
Buy the Book Here
Over 300 pages and 23 chapters, available at Amazon (Paper & Kindle), Kobo (ebook), Apple Books (ebook), and Gumroad (PDF).
The book is packed with useful information to help creatives start and grow their business.
Recommended to Other Creative Friends
“Hi Andy, just finished reading your book. Loved the sections on estimates, billable hours, and timesheets. Recommended to some other creative friends who are running their own biz. Thank you for writing the book :)”
Kasun Pathirage, Freelance B2B Writer, from a DM on Twitter
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