When I worked a corporate job, I rarely looked at my pay stub to see the taxes being deducted. Up here in beautiful Canada, it’s a big chunk so I was content to focus on what was actually making its way into my account. Let the government (and my fellow citizens) have what is the government’s.
When I became self-employed, however, things changed. There was no longer a payroll person doing the math for me every two weeks, which meant I had to figure it out. I’m not really one for reports and tracking so for the first years in business, I just winged it. I guessed at what I might owe in sales and income taxes and hoped that I had enough in my account. And while my guesses did end up being close, having to guess brought with it a vague and constant feeling of dread. The unknown tax bill hung like a cartoon safe over my head. Will I be able to pay it?
There’s so much more peace in knowing.
So last year, I implemented a new system for tracking revenue and taxes I would eventually owe. It was a binder system and while it was quite a clever thing in theory, I still let the receipts pile up all over the place until the end of the year instead of slipping them into the binder envelopes I’d made. For me, if a process is going to stick, it has to be SO easy. And I think that’s what I’ve got heading into 2012.
Money management in 40 minutes (or fewer)
I bought an accordion folder (with high recycled content, of course) and named each section based on what I need to report to my accountant come next spring. (If you need inspiration, here are the forms our Dimitris asks us to fill out – they’ll show you various categories. Your accountant can help you refine yours.) I leave it open where I barely need to stretch from my seat to drop something in. Simple, simple. But that doesn’t mean every time I have a receipt I drop it in. Nope. I let them pile up in my pockets, purses and wallet. The printer tray is another great spot. And that’s okay. It’s part of my process. I let them build up and then, on the last day of the month, I sort them.
I don’t total any of those. I might do that quarterly or at the end of the year. I should do it monthly (and, smarter, should hire a bookkeeper to help) but, for now, my profit and loss statements are simple enough that I feel comfortable being inexact and intuitive. Because I don’t like the stress of surprises, I do approximate what I will owe in sales and income taxes.
To figure out a rough number to set aside for taxes owed, I run two quick reports. I use Blinksale for Pink Elephant Creative invoicing so I can easily see what invoices were closed in a month and what amount of sales tax was collected. (We have to charge the harmonized sales tax – HST – to fellow Canadians who hire Pink Elephant, and at different rates depending on which province they call home. We don’t charge tax for clients outside of Canada.) The second report I run is through e-Junkie because it tracks sales for Creative’s sister business (this one), Pink Elephant Academy for Entrepreneurs. I add up the amount of sales tax from each report and then I move that amount from Pink Elephant’s chequing account into a business savings account. If I were really on the ball, I’d subtract the total I’ve spent in HST for that month’s business expenses before moving that amount over – since the government requires us to pay what we bring in minus what we pay out – but, as discussed, I’m being casual – I save the exact HST math and return for year-end. This way I have more in the account than I will need. And I like the way that feels.
The next bit of math I do is to total the revenue (excluding any sales tax collected) from both of the reports and I figure out what 20% of that total is; then I move that into the savings account. That is the money I’ll use to pay my income tax bill next spring. My tax rate at the end of the year likely won’t be 20% (it will be higher) and doing the math this way doesn’t take into account my business expenses – which will eventually be subtracted from my revenue to show true income – but I’ve found, for my business, that setting aside 20% of monthly revenue ensures there’s enough in the pot at the end of the year to comfortably write that tax cheque. If there’s extra left over, then that’s a trip to the spa (or somewhere more exotic!). You can figure out your own estimate by looking at last year’s tax bill and figuring out what percentage of last year’s revenue it worked out to be. Make sense?
40 minutes each month is all I need. Finding all the receipts and sorting them into my accordion file took exactly 13 minutes this afternoon. To run the two reports, transfer them to Excel so I could save them in a folder on my computer and then add up the totals took 25 minutes. It’ll be quicker next month now that I have a proper process in place. To sign into my banking account and move the funds around took an additional two minutes. If you’re adding, that’s 40 minutes. And now I don’t have to worry about taxes!
Dear creative entrepreneurs: how do you manage your money each month? How do you keep organized? Share your tips for other entrepreneurs in the comments field below.
Writer Carrie Klassen is a green tea enthusiast, novelist-in-progress, fine point pen aficionado, INFJ Scorpio, and president of Pink Elephant Creative, a website writing and design boutique for inspired entrepreneurs. She also writes workbooks and teaches workshops at Pink Elephant Academy for Entrepreneurs.