the accounting guide for every solopreneur

The basics of accounting for solopreneurs, an overview of why accounting is so important and eight tips for successfully managing your own business finances and accounts.

Managing your finances is a key success factor when it comes to running your own business. As a sole trader, freelancer, digital nomad or solopreneur, you’re responsible for managing every aspect of your business. This guide to accounting for solopreneurs thus aims to provide you with the basic knowledge to help you create a strong financial foundation for your business venture. 

Accounting, booking keeping, and tax are all administrative functions that you either know about, or you don’t. Not every self-employed business owner is also an accountant or tax export. Luckily there are lots of tools and resources that can help you manage your finances more effectively.

Below we cover the basics of accounting for solopreneurs, including eight tips for successfully managing your own business finances and accounts. But first, let's consider why accounting knowledge is so important for solopreneurs.

Why is it important to have a basic knowledge of accounting as a solopreneur?

Basic accounting and tax knowledge is a necessity for any business owner. That’s because you’ll always be faced with complex decisions concerning financial management. Proper accounting is essential to answer questions like:

• How to spend and invest your profits?
• How to manage your cash flow?
• How to structure deals and partnerships from a financial perspective?
• How much money to borrow?
• How to deal with joint venture agreements and business funding?
• How to manage your accounting or bookkeeping team (if you have one)?
• How to plan for business growth?

One of the most critical skills of all is managing cash flow - your day-to-day operational budget. If you can’t do that effectively, you may overspend and have nothing left. This may in turn jeopardise your own business continuity in the process. To manage your cash flow, you’ll need to get very good at managing income and expenses via a balance sheet and being able to predict these costs over various future periods. 

Another critical aspect of financial management is staying compliant with relevant tax laws. That requires knowledge of how the tax system works, which tax laws apply to your business (e.g. double taxation treaties), and what is required of you in terms of filing returns and making provisional payments, etc.

Accounting 101 for solopreneurs: learning the basics 

There are a number of things to know when starting a solopreneur business. One of the most vital is how to manage your finances and accounting. Below are 8 basic steps to effectively manage your own business finances as a solo entrepreneur.

1. Keep your personal and solo-business bank accounts separate

It’s a good idea to separate your business and personal bank accounts from the start. If you’ve registered your business as a separate legal entity then you should be able to open a business bank account. However, if you’re trading in your personal capacity, then you could open a separate personal account for your business finances. 

Having separate bank accounts makes it much easier to keep track of incomes and expenses, as well as cash flow. You may also be able to apply for a business credit card once you have a business bank account. Credit can help if you run into cash flow difficulties.

Not an e-resident and wondering how it could benefit you? A limited liability company can be advantageous for solopreneurs. It both limits your liability and raises your credibility in the eyes of clients, partners and investors. E-⁠Residency allows solopreneurs to quickly and easily start a limited liability company, known in Estonia as an OÜ, and run it from anywhere.

2. Create a system to track all of your income and expenses

It’s important to create a system to track all of your incomes and expenses. Make a template for sending out invoices to clients or customers. Then, have a system in place to follow up on unpaid accounts. Most quotes and invoices will need to have your business registration number, contact details, unique invoice number, payment terms and other client information on them. Research these requirements in your local accounting jurisdiction and get them correct from the start. 

3. Go digital (i.e. paperless)

Not only is digital accounting the green thing to do, but with cloud backup and disaster recovery technologies, it can help you to make sure that your record keeping and accounting is safe, secure and accessible for when you need it.

Going paperless also saves you having to physically store lots of records that can take up valuable office space.

It’s important to realize that for legal purposes, you’ll usually be required to keep all your accounting documents for a certain number of years (as well as legal contracts, business registration documents, etc.). This will vary depending on which country you pay tax in, so it’s advisable to check how to remain compliant. 

Working digitally is definitely seen as the way forward by most businesses. Make sure that the country from where you run your business supports e-services, like submitting tax returns online. One of the reasons why so many solopreneurs choose to establish their businesses in Estonia through the e-Residency program, is because of Estonia's secure, well-organised and seamless e-services. 

4. Make a Budget

It’s very important to make a budget for your business when you’re starting out and at the beginning of each year. When making your budget, think realistically about how much revenue you’ll make.  Also think about all the possible costs you’ll encounter: startup costs, service provider fees, banking transaction fees, software licence fees, office or coworking space rent, labour costs, etc. Keep in mind that certain outgoings can be treated as business-related expenses. For example, skills training, tickets for events or conferences, software and hardware licensing costs.

5. Plan your cash flow (and keep money aside for taxes)

It’s best practice to have a budget and try to stick to it as much as possible.  But, don’t be surprised or stressed if you encounter unforeseen expenses throughout the year. For example, if you’re running a cross-border business, you might incur higher tax liabilities on your income than expected. 

Plan your cash flow for the financial year in advance. This helps to minimise the risk of running into debt and being caught out by surprise bills and expenses. It’s good to plan ahead and save enough of your income so that when your tax is due, you have the cash to pay it. Otherwise, you may find yourself in a tricky situation with no cash flow. Depending on your tax jurisdiction and various other factors, your tax may be due quarterly, annually - or in different intervals, so it’s best to research your particular tax situation ahead of time. 

Upfront planning about which country to register a company in based on their tax competitiveness is not a bad idea. Many small businesses are opting to register companies in Estonia because of their simplified tax system and competitive tax rates. In fact, Estonia has ranked #1 in the Tax Competitiveness index for 9 consecutive years.

6. Use accounting software

You can do all of your bookkeeping and accounting manually. However, a professional accounting software package will make your business administration much easier and less complicated. This is particularly relevant for solopreneurs that create a lot of invoices for different clients and customers, as it can become daunting to track them and follow up on them all manually. 

If you pay for professional accounting software, then it can generate your invoices and save your receipts all electronically. 

E-resident founders can take advantage of e-Financials, a simple web-based accounting software offered by the Estonian e-Business Register that helps companies manage their bookkeeping. It is offered for free in the first year of operations and affordably beyond that.

7. Plan for compliance

As part of prudent business planning, be aware of all your legal and financial requirements as a business owner. When it comes to financial management, there are often a  range of compliance rules that will apply to your business - whether you operate as a sole proprietor or an established and registered company. 

Planning for compliance will help you stay organised, and not thrown off course by surprise payments or legal fines for not having done what you were meant to. 

8. Keep track of the professionals

Hiring a bookkeeper or professional accountant can help take care of some of your financial management. This can help free up your time and give you peace of mind that it’s being taken care of by professionals. 

However, it’s critical to actively manage these professionals so that you know what they’re doing. Make sure to spot any errors and mistakes so you can identify any illegal accounting practices or even possible theft. 

It’s also vital to keep tight controls on permissions and bank accounts, and to maintain a good overview of your cash flow.

Final thoughts on accounting for solopreneurs

Get to know the basics about financial management. It's an indispensable first step as a solopreneur. Learn how to track your cash flow, manage professional accountants and bookkeepers, your compliance requirements, and how to manage your invoicing and record keeping. These are all skills that will help you successfully manage and grow your business. They'll also help ensure business continuity.

One final tip on accounting for solopreneurs. Take a hands-on and proactive approach to your business finances. This will help you understand your business risks and opportunities and also help you identify ways to save costs or increase profits. 

This article was written by guest contributor and seasoned digital nomad Andy Stofferis (www.andysto.com).