August/September 2006

Volume 47, Number 1

A Short Financial Management Primer for Independents

by Linda G. Gallagher, STC Associate Fellow, CIC SIG Manager

Managing your finances is important. We’ve all heard the stories about (or perhaps have been personally affected by) rising credit card debt, increasing numbers of home foreclosures, and other effects of neglecting good financial management practices.

For independents, these matters are even more critical. We have to make sure we get paid, pay our federal and state income taxes quarterly, buy the hardware and software we need, and be confident that we’re actually making a profit.

I can’t cover everything in this short article, so I’m going to focus on how we use QuickBooks (QB) from Intuit to manage my technical communication business. I say “we” because my husband is an accountant and helps me with all of my financial matters. He’s the main user of QuickBooks, but I know how to do things, too.

Tracking Revenue and Accounts Receivable

I’ve heard independents say things like: “I don’t have time to do invoices.” That’s crazy! If you don’t make time to do invoices, you don’t get paid. I create my invoices in Word, partly because I do the invoices (rather than my accountant-husband on whose computer we have all of our QB data) and partly because I’ve just always done it this way. I’m not a lover of Word, but my invoices are simple and this works for me.

After I create the invoice, we make sure it’s entered into QB. About once a month, my accountant generates an Accounts Receivable Aging Detail report. This report tells me what invoices are due, when, for how much, and whether any are overdue. I use this report to track incoming checks and to follow up on any late payments.

If a payment is just a couple of days late, I call or send an email to my contact, asking that person to check the payment status. Sometimes, I find that the invoice didn’t get into the right hands and isn’t in process at all. I then ask my contact to have the payment expedited.

Using reports from QB to track my accounts receivable helps me manage my cash flow, which is another big issue for independents.

Monitoring Expenses

We enter all business-related expenses into QB. This includes bills for my phone lines, Internet access, Web hosting, hardware, software, business miles, business travel, and anything else. It takes some effort to enter all this data, but it gives me a complete financial history.

We enter each expense item in a category. The categories help us find historical information and see where the money goes. You can generate expense reports with details for each category, or just the categories. All that flexibility is great.

Profit and Loss Reports and Making Decisions

Each month, my husband prints my Profit and Loss report. This gives me a year-to-date picture of how my business is doing. I see all the revenue and expenses (categories only), as well as the bottom line (net profit). I review these reports carefully.

We also include the previous year’s data (year-to-date) for comparison. I always have a sense of how last year was (good, great, not so great), so this comparison lets me gauge how this year is going. If last year was not really great, and I’m behind again this year, I know I need to get into gear to generate revenue and control my costs.

We use these reports to make decisions. Can I afford to buy that new printer? Can I attend another conference? Do I need to replace a client who doesn’t need my services any longer? All these are important decisions. Without my reports, I would have no idea how I’m doing or whether I can afford new expenditures.

Of course, I need sufficient profit to pay taxes, as well as support business expenses. Once again, the reports help us determine how much to pay each quarter. If you’ve only been an employee, this is a new task for your “to do” list. If you work on a 1099 basis or business-to-business (not as a W2 employee), you have to pay your own taxes each quarter. Your clients don’t withhold taxes from their payments to you. This is a large chunk of money: figure on about 40% of your revenue by the time you include federal income tax, social security (the biggest chunk), and state income tax.

Finally, I hope I have money to help pay the mortgage, home phone bill, gas, electric, groceries, gasoline, and vacations that are part of our living expenses. After all, this is why I’m in business. I want to contribute to my family’s coffers.

Closing Thoughts

One thing we don’t do is create an annual budget. We should, but we have enough history and low enough overhead for us to keep a handle on expenses. This is one area where I suggest you not do things the way I do. Develop a budget for your business each year, and track your actual revenues and expenses against that budget each month.

We find QuickBooks an invaluable tool for managing my business. We can always see how the business is doing, and regular financial monitoring means that we can make adjustments before we run into trouble.

Regardless of what tool you use, managing your finances is critical to the survival of your business. Plan ahead, and you’ll prosper.