As a creative freelancer or owner of a creative independent business, good financial hygiene is the key to success. However, sometimes money management can leave us feeling overwhelmed and out of our depth—we're good at creating, not filing taxes!
If only there were more transparency in the world of financial management and clear-cut answers to your most pressing financial concerns—what is the best way to organise your finances? What expenses are eligible to be written off? How do you build a budget with a fluctuating income?
Thankfully, you've ended up in the right place. We invited our creative community to an "Ask Me Anything" session with accounting expert Claire Van Holland. Her advice helped clear up financial confusion and empower our community to make better financial decisions for their businesses—and we want to share the advice with you too.
Meet our expert: Claire Van Holland
Claire Van Holland is the founder of CV Ledger, a modern accounting firm built for creatives. Claire is first and foremost a creative, who just so happens to also like crunching numbers. She fell into data analytics, financial projections and budget forecasting over the course of an extensive career in corporate media, which saw her work with media giants including Pandora Media, Disney Interactive and MySpace Media.
After co-founding a furniture design business with her husband Aaron in 2011, she realised she could provide more impact by using her corporate analytics experience to help other creatives achieve financial autonomy through collaboration. She launched the CV Ledger in early 2016 and the rest is history.
A word from Claire:
"As an independent business owner or creative freelancer you're already busy enough, you don't need the stress of managing your finances constantly looming over your head. I know full well that organising and managing finances is the last thing you want to be doing—you'd rather be creating of course! And so this is me looking out for my creative tribe, helping and empowering my fellow creatives to overcome the stigma and uncertainty when it comes to managing money.
Without further ado, let's set you on the road to financial success...
What is the best way to separate your personal finances from your business finances as a creative entrepreneur?
The best way to separate business finances from personal finance is to simply create separate accounts. Yep, it's that easy!
All of the money you earn in your creative work (whether that is full-time, part-time or freelance) should be deposited in your business bank account. So if you get paid an invoice by a client, you flow all of that money into your business checking account. All work-related expenses should be charged from your business account and personal expenses that have nothing to do with work—groceries, for example—come out of your personal account. You should never meld the two.
If you want to take it a step further, you can also have a business credit card. Whether or not it is actually registered officially under a business is neither here nor there, as long as you are not incurring any personal expenses on that credit card and it is used solely for business. The golden rule is ensuring that you never put any personal transactions on there because that's when it starts to get confusing.
You want to mitigate the stress of crossing the lines between business and personal as much as possible, especially come the tax-return season, and I promise the simple action of separating your accounts will do so.
What account types should I have as a small business owner?
Disclaimer: how you structure your accounts comes down to how you are running your business, how complex and layered it is and how much money you are moving in and out of your accounts.
The most common account types for small business owners are:
- Income account. An account that houses all the money coming into your business.
- Operating expense account (which can also be a credit card). An account that deals with all your regular dues/expenses.
- Payroll payments account. An account dedicated to paying out employees, contractors and potentially, yourself.
How do I approach paying myself a wage as a small business owner?
The easiest way to give yourself a wage as an independent business owner is to take a "draw" or a "distribution" for yourself. This is as simple as deciding upon a fixed amount you'd like to earn each month and then transferring that money out of your business account and into your personal account. It sounds a little bit too easy, but that is it. You could even set that up in increments, or change the frequency to suit your needs: once a month, twice a month etc.
There is also the option of running a payroll for yourself, meaning that you are designating yourself as an employee of your own company. Therefore, when you pay yourself, you are also paying out payroll taxes. Of course, there will then be requirements contingent on whether or not you are officially registered as some sort of corporation and dependent on your region. If you are considering the payroll option, thoroughly look into those requirements or seek advice from a professional to ensure you are not putting yourself at risk of incurring plan penalties.
As a freelancer, my income varies from month to month. How can I budget for this?
For personal budgeting, first list out your fixed monthly expenses, the ones that you can definitely expect: rent, groceries, and subscriptions. Now work out your projected monthly income. Start with the months you can predict your income: recurring work, pre-booked clients etc. This will just give you insight, even if there are shifts and changes and adjustments along the way. Don't be generous, always err on the side of caution and work off the lowest possible income. Subtract your fixed expenses from the income that you are anticipating and get a sense of what money you have left over. If you are in the negative, you know that you need to identify areas to cut back spending or really step on the gas in terms of finding additional client work to pad out your overall earnings.
If you're looking to create a business budget, again start by listing out your essential expenditures; the basic things your business needs in order to operate: rent, software, payment processing, utilities, etc. Once you have figured out where you are currently spending your money, the next layer is identifying where you need to spend money next. A good example of that would be training expenses, or enlisting the help of subcontractors. Maybe you're in a situation where you can't take on all of the work yourself so you want to bring in external help—what is the cost of doing so? Once you have identified these current costs and projected costs, you need to work out a monthly total—that is your budget.
Good budgeting is a mixture of building good habits, having good tools and planning ahead—always budget for a minimum of 6 months ahead.
What is the best financial organisation software for creative entrepreneurs?
Often people don't want to pay for financial software and instead choose to keep it old school with a spreadsheet, but then you lose the beauty of automation. And so, I really do encourage you to make the investment for yourself and for your business because ultimately it gives you peace of mind and saves you buckets of time.
Finding accounting software that works for you is half the battle in feeling confident and secure in managing your finances. As a creative myself, I understand the importance of finding visually appealing software with a good user interface
My personal recommendation is Xero, they pitch themselves as being beautiful accounting software designed for small businesses—and I agree with that. I also recommend FreshBooks for freelancers or anyone who regularly deals with invoices. I'd advise trialling a number of systems to see what resonates with you in terms of usability, technology, and experience. If you need some help getting started, I offer training sessions in using Xero.
I am a freelance content creator, in addition to being a 9 to 5 employee. What do I need to do to avoid any tax surprises at year-end?
If you have a 9 to 5, there will already be taxes automatically taken out of your pay check. As a freelancer, your taxes won't be automatically deducted—you'll need to do that manually.
Tax levels vary depending on your location, but 30% of your wage is a good base measure of how much to set aside—better to assume higher than be caught short. For every payment that you receive as a freelancer, let's say it's $500 this week and $2,500 the next, you want to put 30% of that sum aside to cover your tax payments.
I recommend setting the money aside in the spirit of "set it and forget it." If you have a separate tax savings account, which I recommend everyone does, then transfer the 30% immediately into that account and then you don't have to worry about it intermingling with the rest of your money.
How can I get the most out of my expenses when it comes to taxes?
The very first question you ask yourself is, "Is this a business-related expense?" If the expense is directly incurred as a result of the work that you do, it is eligible to be written off. For example, you can offset expenses related to research and development. As creatives, we draw inspiration from an endless number of places. Maybe research takes the form of going to a movie because you are creating a branding identity, or taking a trip to experience an area that influences your craft in some way.
Remember you need to be prepared to justify why each payment is an essential expense for your business—if the answer feels a little too far-fetched, be careful. For example, people often ask me whether they can write off a very expensive meal. My response is, "What are the justifications for that meal?" If you met a potential client for dinner in order to secure a big business opportunity, maybe that is eligible. If you treated your significant other to a classy dinner, the answer is probably not. You need to justify the direct impact of any expense that occurred on the work that you do.
Next, maintain good accounting hygiene. Build the habit of classifying your financial activity on a regular basis so that at the end of the tax year, or the end of any given month or quarter, you'll be able to pull your financial statements (income statements, balance sheets etc.) and take them directly to whoever is preparing your taxes. They will then use that information to prepare your tax submission for the year.
Finally, be discerning about who you work with for your tax preparation. Work with a professional who understands your industry and exactly what it is that you do. If you're working with somebody who doesn't understand your industry, you're doing yourself a disservice because they'll likely run more on the conservative side of tax write-offs.
Got more questions? Reach out to Claire via her website or on Instagram. Alternatively, tune into her podcast, Naked Finance, for a regular dose of easy-to-implement financial tips and tricks for creatives and small business owners.
Visualist regularly invites industry experts to answer the practical questions of our creative community. Brand messaging, financial management, legal contracts—you name it! Want to join our club and bag an invite to our next session? Sign up here.