We talk to Luke Frye, CPA and Co-Founder of Timber Tax, about cash flow forecasting, planning in these uncertain times, and how to get a firmer grasp on your financial reality so you can succeed in your business.
- Reuven Lerner
- Kai Davis
- Jeremy Green
- Meg Cumby
- Erik Dietrich
Each episode, the panel (and guest) share their picks: a book, app, service, resource, or something else that they’re enjoying and recommend you check out:
- You Need A Budget: youneedabudget.com (Kai Davis)
- Freedom: freedom.to (Meg Cumby)
- Embr Wave: embrlabs.com (Erik Dietrich)
- The Pumpkin Plan by Mike Michalowicz: pumpkinplan.com (Erik Dietrich)
- Bench: https://bench.co (Jeremy Green)
- The Independent Consulting Manual (Jeremy Green)
- The Passion Economy by Adam Davidson (Reuven Lerner)
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WHAT IS THE BUSINESS OF FREELANCING?
If you’re a freelancer, then you’re not just an expert in your field. You’re also a business owner, responsible for everything from bookkeeping to marketing to customer satisfaction to business development.
On the Business of Freelancing, our panel of experienced freelancers discuss the issues that they have encountered while building up their business — and give you practical, actionable advice to take your career to the next level. We also invite expert guests to provide their opinions and perspectives on how you can better succeed in your freelance career.
Reuven: Hi everyone and welcome to the Business of Freelancing podcast. This week we will be speaking with Luke Frye. He is a CPA and a consultant on financial issues to lots of independent consultants and freelancers all over. We’re going to be talking with him about Cash Flow projections, planning, what you need to know, and how you can weather the storm of this COVID-19 and Coronavirus pandemic and come out the other side better than ever.
Kai: Today on the Business of Freelancing we’re joined by my friend Luke Frye, a CPA up in Washington. We’re going to have a great conversation today about Cash Flow Forecasting, planning in these very uncertain times, and options for freelancers to generate some cash. So, Luke, tell us a bit about yourself.
Luke: Yeah, thanks, Kai. I’m happy to be here. I always enjoy talking to an active audience who’s really engaged and ready to hear something about what we’re talking about because as you can imagine, accountants don’t usually get a very excited audience. So, I’m I am a CPA, licensed in Washington State, and I was also the first accountant at Bench Accounting.
So for almost 10 years, I’ve been focused on very small businesses, and some of the very basic stuff I’ve in college certainly done some internships, in audit, and I’ve done some governmental internships, I’ve done governmental accounting. For me, it really is just a lot more fun to help people like us tackle the game, as opposed to mega corporation. So that’s a huge part of my focus.
I also was a small business owner as a teenager. In my tiny town in Wyoming and so I learned about quarterly taxes when I was mowing lawns in the summer, and how to pay quarterly taxes. So, a lot of this I take for granted being second nature, and I know that there’s a lot of people out there who could just use some extra help.
Kai: In these times, as you know, those indie businesses, those small freelancers or small agency owners, as cash flows get disrupted, new expenses pop up, clients cancel contracts, because of just the uncertain times. What are some steps people can take to better understand when and where cash is coming from and whether they could handle upcoming expenses?
Luke: Absolutely, I think the most valuable thing any business can be doing if they picked one thing for managing their cash and making sure they’re staying in business, whether you’re making hundreds of millions or billions or trillions of dollars, or whether you’re making $100 as your cash flow, understanding your cash flow.
I’m not talking about what I studied in accounting as far as a cash flow statement, even though it might be helpful or useful. What I’m talking about is the Cash Flow Forecast. The best way to think about that in regular people terms is it’s like a reservoir. So if you were to imagine a river going into a pond, and then you put a dam on the end of it, and then on the dam, you can release the flow out.
So the money in you can think of as maybe revenue, personal contributions, investments, and then this pool in the middle that may be as a pawn to start with and maybe is a very big ocean, eventually, is where you’re sitting, and you ideally have control over how much comes in but also how much goes out. The real thing is, it doesn’t matter necessarily as much, how much you have on hand. So very profitable, very successful businesses they have very little cash on hand, but they have a really good flow. So lots of money coming in, maybe lots going out.
So, what that means tactically in an Excel spreadsheet or Google Sheet, is you always would start with, what’s your opening balance? What do I have coming this week? What’s my ending balance? So, again, the opening balance is really how much water, how much cash, how much is liquid right now?
Then the inflows could be things like accounts receivable, invoices that are going to be paying you, recurring revenue, maybe you have some sort of productize service offering, you have a PDF that you’re selling. You have some funny Zoom backgrounds that you’re selling. Any of these things that are available, you can track and maybe you’re tracking some marketing metrics on ads, but that’s all the in flow.
Every business owner should be doing-especially right now, a 13 week Cash Flow Forecast. Actually, I do have a video explaining it in more detail with a link to a template that I can share with everybody. But the goal is don’t make it more complicated than it needs to be. It’s not something that has to be penny perfect either. It’s just general terms like you know your rent and other general stuff that you can’t change is 2000 bucks a month.
As freelancers or self-employed people, one thing that we can really rely on is, this also works for our personal because our business is so directly connected to who we are. We’re all at home right now. We may be all we’re working from home, to begin with. So, you can take your business part of it, and your personal part of it, and every week you fill out what are you going to spend, and then the next week, you fill out the actual, “I actually spent this much.” Then you update each week moving forward. So it’s a constant iteration of looking forward and reviewing last week.
Kai: I love that as an approach. I’m curious why 13 weeks as the recommended time to use this for?
Luke: It will vary depending on the person in the business. We often, like any forecasts, right? If you get the Farmer’s Almanac and you say, “Oh, this Fall is going to be a wonderful harvest season.” It’s hard to buy into. But if you say, “Today, it’s raining.” It’s very obvious it’s raining. So something that’s a bit more close to reality is easier to stay, stay connected to, and be invested in.
It’s also far enough out that theoretically, you could make some sort of a change, I’m going to say that maybe a lot of our selling cycles. So the amount of time it takes from finding a lead to converting them maybe is about a month or something like that, or just for an example. So, if you’re doing 13 weeks, you have some time to adjust that or maybe run a marketing plan, or do some ads, or ask your parents for money, whatever you need to do.
Meg: What kind of tools? Do you like to recommend using to do that forecasting? Or like is it as simple as a spreadsheet?
Luke: It really depends on the person. Honestly, a notebook is totally fine, a piece of paper and a pencil. I think wherever you are most comfortable is the most important place to start. Because I even as somebody who is a CPA, has an Accounting degree, and has been in spreadsheets and doing this stuff. I get annoyed and overwhelmed with some software that do this really wonderfully.
So start is where it makes sense to you, and so that probably means Excel or Google Sheets. Google Sheets is nice, because you can share them more easily. We can collaborate on it more easily and you’re not worrying about versions and updating.
I have been working with a software company right now and I’m with all my client’s trying to go through their 13-week forecast. It’s called Dry Run, dryrun.com. Their pricing, maybe a little bit prohibitive for people making maybe under $100,000. But I do find it to be very easy to use simple, and they’re actually offering it for free right now.
So for the next two or three months, and after that, I believe they charge about $100 or $250 a month depending on the plan. But it’s really nice because you can say, “Here’s the baseline.” It’s totally customizable, depending on what your scenarios are.
So, if you applied for the Paycheck Protection Program, if you applied for the Economic Disaster loan, those are things that you could say, “Okay, here are some best-case financing scenarios.” So maybe one of them is that you applied for the Economic Development loan, and you also applied for that $10,000 grant on it.
So, the best-case scenario could be for you, you get the grant, but you’re not approved for the loan, and then you get to keep the $10,000. But you could also run another version that says, “I get that $10,000 grant initially advance.” Actually in this case, and you’re approved for the loan. Now I need to build into, “Okay, how am I going to pay that all off?” So Dry Run is great.
Float is another app out there. Jirav is another one I was recently introduced to J-I-R-A-V. I don’t have as much experience with them. They’re all somewhat nuanced. Another one that I know was free, that was made by a bookkeeping firm is Cashvue, C-A-S-H-V-U-E and I believe that is free, but on my view of it is very hyper-detailed, and some of them integrate with your accounting system.
One very, very, very big distinction between this is I’m not talking about bookkeeping. I’m not talking about a profit and loss, I’m not talking about a balance sheet and I’m not talking about cash flow statements. I’m talking about [inaudible] those all look backwards. Okay? That’s where tons of the industry is in accounting, but where I want to go and where most of our automations and advisory level relationships are going and let’s look forward.
Don’t look through the rearview mirror, let’s look forward and see, what are the actual invoices outstanding? Who’s actually going to be able to pay? So, it’s not as important if it integrates with your accounting system as it is. Does it let me do what I need, make assumptions, guess, and update them every week?
Jeremy: So you mentioned bookkeeping and earlier mentioned Bench, which I use and love, it’s great.
Jeremy: I love being able to give that part of my business to somebody else to pay attention to those details because I want to be focused on different details. Are these services that you mentioned similar in that level of service for you? Or is this software that people would subscribe to, and then be entering numbers and running those books themselves?
Luke: Mmhm. Wonderful distinction. The point you’re making is how much of the work and heavy lifting are you having to do? How much of the responsibility are you delegating versus taking on yourself? So, a very big difference with Bench is they not only have the software platform, so proprietary software, that exports to Excel and is usable.
They also have people so even though they’re the most automated bookkeeping company, I know, in the world, they have hundreds of bookkeepers, doing bank recs, okay, because we’re just not there yet for everything to be automated.
So, when you buy any of these software’s all of the ones I have mentioned, I don’t know of any who are built like Bench, all of them I know of are software that you either have to operate or work with someone like me to help you operate, which is general advice I give to every business owner.
I don’t think it’s important for you to be close to the details of the transactions. It’s important for you to be close to the details of the financial picture, meaning hire somebody like Bench, hire an accountant to do the tedious, heavy lifting, work with them to discuss it. So maybe you’re spending the same amount of time it’s just on higher value stuff.
Kai: That’s a brilliant distinction. I love that it, that nudged me in the right direction just overall, I love that. The best practice isn’t for me to like no to the penny every transaction but like Okay, got 2000 of expenses going out the door this month got 3,000 of revenue. Looks like I’m heading in the right direction.
Erik: So what if you’re getting a feel for what your cash flow is going to look like, maybe just do this exercise in the spreadsheet or use a piece of software. I imagine a lot of people right now… What you’re looking at doesn’t look good to you, either you’re anticipating some attrition with your clients, you’re anticipating maybe a lot of attrition or being in some trouble.
Like, if you look out over the next quarter, and things look bleak. What are some options that freelancers might have that you could recommend to keep them going?
Erik: Granted, there’s going to be like some nuanced out there, but loans obviously there is this triple P program. There’s a lot of stuff going on. What would you recommend that people look into and how to know what to do?
Luke: Yeah, that’s a really good question. A really important one and it’s quite wonderful. Not to downplay how horrific a lot of this is for the entire world and all of us and a lot of my clients. I have quite a few wedding photographers, and so I know they’re going to be hit really hard, which means we’re going to be hit really hard.
The goal of doing this Cash Flow Forecast is getting close to reality. Especially with accounting and taxes, most of us run and avoid it as much as possible. Ideally, you’re able to sit with this and with a level of acceptance. If you can accept, okay, this is potentially what’s going on, you might even start to enjoy, okay, what is the worst-case scenario? And then what can I do? What is the best-case scenario? And what do I need to do?
So, if you have a tool to really look at those objectively, and say, we end on the worst-case scenario, what are some options you have? Maybe you’re at a point where you realize you hated the work you were doing or you hated a client you’re working with? Now’s a great time to unload that deadweight, and perhaps pivot.
I try to avoid startup jargon as much as possible, as the cliche but maybe now is the time that you look at what you’re offering and say, “Actually, I could do that for a 100 people, or I could do this for 10 people, and I would love my life and they would probably like me a lot more too if I did that.”
Other things I’ve seen people doing or the Patreons, maybe you have an active group of people who do follow you, perhaps Patreon. I know that at least Kai for sure has talked a lot about productizing some of your services. So again, trying to get some of your best drafts out there and put some sort of a paywall out.
It’s tough, even on our end at Timber. I am trying to offer as much help to people as possible, who are current clients, that means I’m answering triple P questions. I’m answering SBA questions. I’m trying to help people with unemployment even solo proprietors who may qualify. I’m doing free Cash Flow Forecasting, a lot of this stuff ordinarily I would be charging for.
So I think that there’s an element of put your own oxygen mask on first, but then also, “Okay, now looking at everything that’s going on, what other options do I have? Is there somebody I can collaborate with? Is there a podcast I can start? Is there a podcast, I can be on?”
If you can get out of the fear and panic mode, it becomes a really nice way to reevaluate things that maybe you can challenge the status quo. We have all these people who have been working corporate or government jobs and it was never thought of it they could work from home. Well guess what everybody is, and we’re doing okay. It can happen.
Kai: I love that. That’s a strong and powerful message for people, especially that this can be a huge disruption, but it doesn’t need to be a disruption that’s viewed entirely as a negative. It could be like okay, things aren’t going the way I wanted them to, but as you put it there’s this other group of clients I could serve. There’s another way for me to bring my services or my skills to market. That’s a powerful message for anybody listening to this.
Reuven: Without getting all the specifics, like, different plans, and so forth. If I’ve got a decent amount of income coming in the next year, assuming even like, some of my clients are going to be okay, and I have some money in the bank. So I don’t need to panic, given all these loan programs that are being suggested, and offered by the US government, other governments to businesses.
Is it a smart idea for me to go and take a loan just because I can? It sounds like see it as free money? Or is it wiser to say, “You know what, I don’t need it? I’m just going to rely on what I’ve got in the bank.”
Luke: I think what you’re asking is really more a question of morality and values, and I have actually struggled with this a little bit because I can look at the rules. Even though they are and have been changing and unclear, actually it does seem like many of my clients who maybe could weather the storm easier actually qualify and qualify for much more government help than those who probably need it most.
So the reality is, we have seen some banks already exhausted lending, I think that some more money will be dumped into these programs, and maybe has been by the time we’re listening to this. But I would say that that’s even probably a bit of a mindset thing with how we view money and how we view our relationship to money and whether we deserve it.
I won’t go too far in La La land, but if you’re doing good work, you’re helping people and you are following the rules, you’re not trying to commit fraud. You should apply and if you get the money, then you get the money and try to do your best and do good with it and help people who may be otherwise couldn’t. But I certainly could appreciate an attitude of I have enough cash to go through a year. I know my clients are pretty recession-proof. I’m going to just let everybody else get the cash that they need. I totally get that.
So, there’s bread on the shelf at the grocery store is the last one and you see somebody behind you. It’s easier to say like, “I’m going to let that lady get it instead of me.” So probably meditate and see how you sleep on one of those decisions.
Jeremy: Just to circle back to one thing real quick. Earlier, you mentioned somebody might want to hire someone like you to do Cash Flow Forecasting for them. What’s the job title or service that they would be seeking? Because I’ve talked to a financial planner before, and it wasn’t exactly that it was more like, you talk to them once a year of that and it is kind of “Here’s where you’re going to be by the time you get to retirement.”
Luke: Right. Yeah, this is a strange world, and one that because I have a degree in accounting is easier for me to understand. Like, I’m looking at several of my accounting books, for example, this is one I like to get out. This is a 2016 book just on S corporations, and it’s many thousand pages long. So people often say like, “Oh, talk to your accountant.” The reality is that accounting can have so many different levels of specialty, almost like a surgeon or a doctor.
Just make sure that you’re communicating all of your needs, like any successful relationship, and that you’re hearing it back to you. Words I would generally recommend looking for would be like a CFO type of a thing, forecasting planning, business advisor.
I’m also realizing that on my website, I don’t say anything about Cash Flow Forecasting, and so just to have the conversation. Most financial planners are going to be geared a bit more towards longer term investment and advice. So it might be more of a day to day tactical person. So strategy finance, that might be the other distinction rather than accounting forecasting is typically more of a projection. So like a finance type of thing.
Just try to get really clear on what you’re asking for. Obviously, I’m happy to help people if they are looking for somebody to work with on this type of thing.
Jeremy: Awesome, we’ll definitely have some contact info for folks at the end of the show, and in the notes.
Erik: One thing I’m wondering about, in terms of like, forecasting cash flow is probably shortly following this bottoming out of the economy and everything that’s going on. I imagine there’s a lot of revisionist history in people’s minds as to how much retained earnings somebody should let there be in their business or how much of a war chest a business ought to have.
I bet a lot of people thought not nearly as much a year ago is that they think you ought to have right now. I recognize that this is a super complex question, but is there general like say you’re a freelancer, and in the beginning, you’re probably just paying the mortgage, but at some point, you might set up a structure where you’re actually letting money profits in the business, you’re paying yourself a salary, whatever it might be.
Is there guidance or wisdom you have when it comes to cash flow planning for how much profit you should be in the business before you invested in something? How much of a war chest people ought to have or is that just too nuanced for business to answer?
Luke: It’s a really great question and a very close service way of thinking idea is the Profit First methodology. So it is one that I have read part of it and I thought this is too complicated, so I stopped. I know that it’s very successful for a lot of people. So Profit First is a book that basically says, no matter what, because this guy, I’m forgetting his name, Michael, something.
But the idea is that you always should be setting aside this amount of money of profit before you do anything else. In conventional terms, the profit is at the bottom of the income statement, so income expenses profit. His argument is set your profit first, and then everything else happens after that.
I do like that, theoretically, the actual implementation feels complicated. I know they have a certification and you can work with certified pros. We’re all going to experience this differently and we all feel safe differently like some people I’m going to assume that if you’re listening to this show and you’re a freelancer, you already have a higher appetite for risk than most people.
Even though having a job is even riskier in times like this, but I would say that probably three to six months of expenses available, maybe that’s cash, maybe that’s credit cards, maybe that’s the line of credit.
All of my advice initially, when this all started happening is increase all of your lines as much as you can just to have it available. Not to use it just to have it available.
So I would say, there are some fancy formulas like Profit First. There’s also fancy formulas that you can work in from like, how long does it take to get a lead? How long does it take to convert them? How much are they worth? Then you can really figure it out based on your lead volume and your cash in your bank.
So, again, the simplest answer is almost always the best answer here. It is, do you have kids, do you have another person you’re supporting? Are you helping support a parent or something like that? So you might need to be a bit more conservative. A really easy if you want just a quick answer would be three months of expenses available is really good. But it also might be a good time to look at your business model and perhaps switch it from billing after you do all your work to maybe you build half of it upfront. Maybe you bill all of it upfront.
We get paid every month in advance throughout the year before we do any of the actual work of the tax return. We’re in a world where that actually works for a lot of people because they’re not writing a big check. They know how much my bill is going to be every year. So it might be an opportunity to think about how you’re charging for your time, but I’m curious to see if Megan has any thoughts on Profit First.
Meg: I actually just recently… I want to say finished the book about two months ago or so. So, I highly recommend it for anybody who’s something like I’m a sole proprietor. Some people have LLCs [inaudible] . Mike Michalowicz, I can’t pronounce it Mike Michalowicz. If anybody’s looking for, I’m sure we’ll have a link in the show notes.
But the thing that really resonated with me was the putting aside that 5% even starting with 1%, just as to get into the habit of getting some part of it set aside, and actually looking at your services and making sure that there is profit there first, which is really just what it really all boils down to.
Meg: Yeah, it does get a little complicated with the… I think he recommended setting up five-plus accounts.
Meg: It’s an interesting setup that I’m actually looking into I don’t know if anybody else has been looked into it.
Jeremy: That gets to a question I just wanted to ask, which is, as this reservoir is building up in your business, is the best place for that to happen just in your business bank account, or are there other types of accounts or vehicles that you should be putting some money in to handle it better or?
Luke: Mmhm. Yeah, I would recommend, everyone has a separate business account for operating expenses, and then also at least a separate income tax savings account. I take some of the principles of Profit First and apply them at least just to the tax portion. So, if everyone took my advice that I gave them of saving 30% of their cash for taxes, and maybe they didn’t make their actual quarterly sauce here.
They’re sitting on 30% of last year’s revenue, and maybe even part of this year’s sitting there just in a fund that they could hold on to. Now that the deadline has been extended, they’ve automatically had this extra cushion. That’s an example of the simplest thing is the best. I also am a fan of just any these systems like Automatic Millionaire is one where it’s just setting things up to automatically save and set money aside for you.
The other one is The Richest Man in Babylon. This funny story kind of odd but funny about being in major debt and just having a very simple system to pay yourself first. Pay yourself first 10% always in that’s permanent, and then work on minimums and paying other things. Any of these you can try on for size, like, do you use a Mac or a PC, you should use a Mac now you can use a PC, or what kind of car do you drive?
It comes down to understanding what’s right for you and how you want to be successful and be realistic with yourself. So, no matter what, try to have some sort of regular as automated as possible system. If you’re the type of person who spends maybe it’s like the freezing their credit cards in ice, or maybe it’s putting it in some a savings account that takes a few days to get your money. Maybe it’s when they have to go into a credit union to get the money out if spending can be tough for you, so put the cookies as far away as possible type of thing, if that’s the thing.
I would probably say this liquidity that you want the closer to cash the better meaning not necessarily in stocks. Maybe that’s something you also do and maybe work on retirement plans like Solo 401k, a SEP. If you don’t know about a SEP and you’re a freelancer or self-employed person, that a SEP is almost always your best bet. Those things are in addition to and I wouldn’t really think of retirement as your emergency fund.
Erik: Can I ask you something super tactical?
Erik: You had mentioned the deferment of deadlines. Do you know if the IRS in the US has pushed back the quarterly estimate filing deadlines as well?
Luke: The Q1 Yes. So that’s April 15th. April 15th, is actually the first quarter of 2020 deadline. We often think that’s just all 2019. The second quarter, as far as I know, right now, which is June 15th, which is a funky deadline, because it’s not actually after the second quarter has not been extended to my knowledge.
But again, this is something that I very highly recommend working with an accountant on, and be super clear that you want support on quarterly. Most people go to an accountant, they pay 500 bucks, they get their filing done. They’re like, “Oh, also, I need advice on my quarterlies.” That’s a separate thing. That’s something that we really try to leverage is advising on quarterly because you can either pay the Safe Harbor amount or a projected actual and thinking through that decision has so many different factors, including is their W2 in the picture.
Have you moved, is there other income or losses? Because the reality is not paying your quarterly estimates is a very cheap thing to do. Meaning the penalties for not paying tax half a percent per month. So if you owed $10,000 in tax, it would cost you 50 bucks in federal penalties not to pay it.
So if you actually have the cash, especially right now, my general advice is don’t make the quarterly payments, keep the cash for yourself because maybe by the end of the year, you might not actually be at a profit, or you might need to pay for some sort of medical care in the US.
So I think keeping the cash available is better overall. Now, that’s general advice and also depends on your situation and your state. But as far as I know, second-quarter still due June 15th.
Erik: That’s a really interesting bit of advice about holding on to that as a form of savings if you will, that you can tap into, I’d never even considered that. Something else I’m wondering about anyway, this is a little bit like, I guess morbid from a business perspective. But if you have a business, whether it’s pure freelancing like dollars for hours, or if you, have something else that you’re doing kind of a mix of lines of business, and the cash flow projection starts to look pretty bleak.
There’s got to be a point. There’s a point where you pull the ripcord and you think of something different, whether it’s switching your business or maybe even going to look for a nine to five job. Again, I get this as a little bit nuanced.
But if people are out there listening, and they’re seeing their prospects dry up, are there good heuristics for asking whether this might not anymore be a matter of just tuning or really hitting the ground running with outreach and trying to drum up business but maybe there’s something fundamentally wrong. Do you have, in your experience, ways that they can recognize signs that they’re in an untenable position that doesn’t look like it’s getting better?
Luke: Mmhm. That’s a nuanced question. It’s tough because one of the books I always look at, when I’m feeling a bit discouraged is the Austin Kleon, Keep Going, or even Seth Cohen’s, What to Do When it’s Your Turn: (And it’s Always Your Turn).
I am remembering in college, I was thinking I wanted to be a lawyer, it’s what I thought. I asked some speaker who is a judge or something like, “Oh, I heard there’s too many lawyers out there.” His advice was, which is probably true, but his advice was, there’s always room for somebody who is excellent at what they do or doing good.
If what you’re doing, you are passionate about, you care about and has some viability, that my general advice would be to just keep going. If you’re doing something that maybe you’re not totally committed to, and commitment is something that we all thankfully have time in isolation to think about, as far as are you committing, because you’re saying, I have to do this, and I’m the best and you’re not actually listening.
But there’s a very personal answer there that you just have to sit with and think through. Am I really enjoying this? Am I really doing good? Am I helping people? Is there an appetite for it? And then if it is, and you believe in it, I would just keep going, but it might be a time to really think through, “Oh, am I just doing this to try to get rich? Am I just doing this to feel popular or famous or whatever it is?” That might be a way to really dial in what are our real motivations for some of this?
Kai: That’s great. I love that answer. Like there isn’t a cut and dry. It’s much more of that holistic look into the self. Do you dig it? Do you not dig it? Is it because you woke up yesterday and you were doing it before? So you just move forward. But it really does take that intentional pause to say, “What am I getting out of this? Is it moving me towards that dream?”
Luke: Mmhm. Everybody’s experiencing this right now, an advantage we have is the experience we have and not that everything we’ve done, we have to continue doing. But the reality is, we have this experience, I have this experience in single-member businesses, S Corp, quarterlies, small business, self-employed people tax stuff.
So going through this period of time is only going to make me a better advisor. It’s going to help me communicate my value better. So, if you are in a field where people need you, and especially right now, in a year when you’re having a conversation or in five or 10 years, that’s going to give you a patina in your conversation that is going to really help them understand and also give you confidence to know your value as well. That’s something as self-employed or freelance people we often struggle with is understanding and communicating and commanding our value.
Kai: Heck an amazing answer, my friend.
Reuven: I know a lot of people are, shall we say, less employed now than they normally would be, clients are not doing as much. We’re also trying to rejigger things, and so people are looking to learn new skills and improve themselves to get a better job, and we as freelancers are certainly doing that for businesses.
What sorts of things do you think would be useful for assuming we have time for freelancers to learn about finance wise, tax-wise that people typically don’t know? I must admit, I’m one of these people who goes to my accountant once a year sort the annual books, and he says a lot of things and points to a lot of things, and I signed on a lot of dotted lines, and I go, “Uh-huh.” Then a year later, I come back and we go through the same charade and I ask him any better questions. So, what should we be looking to learn given the opportunity?
Luke: Because I’m an accountant and maybe talking more about this world would be more valuable for everybody is certainly spending time on understanding your financials. So, some super basic things are, “Do you know what a profit and loss is sometimes called an income statement?” It’s the same thing. Revenue, expenses, net, that’s your bottom line.
Do you understand those numbers? Can you point to it? If you’re doing your own bookkeeping, the absolute number one thing you cannot f up is your bank rec. So do you know how to do a bank rec? A lot of these are like really thankless accounting bookkeeper jobs that people don’t totally get into, like, “Why am I paying a bookkeeper?” A bank rec isn’t one of the number one reasons. Do you understand what your balance sheet is?
Reuven: No. So what is a bank rec, let’s just make sure that I know what it is.
Luke: Depending on the software that you use, there are probably a bunch of videos out there. But the idea is, you have a set of books, okay? Let’s say you’re in QuickBooks, and you have bank transactions, including invoices and stuff. They come through, and we have this automatic feed, and we’re like, “Oh, we live in the future and everything is automated.”
Well, the problem is, these bank connections are not perfect. Sometimes there’s missing information, or sometimes there’s duplicated information. Or sometimes somebody paid a dollar too little on an invoice so it didn’t match, so now I have this invoice and this payment. So reconciliation in the simplest termsis do my books reflect the ending balance that my bank reflects? So is there a true foundation? It’s like the foundation of any good financials is a reconciliation? Are these numbers reliable?
Reuven: Okay, that’s the name for what I spend endless hours back and forth emailing my accountants, bookkeeper about. Excellent I can now put a name to this. So this is a thing that would be worth it for us to learn and dig into. So we have some time to serve and improve our understanding of our finances.
Luke: Yeah. My advice is always to hire that out. But if you are doing yourself, you need to make sure that you understand it. I think the financial analysis is more important. So I’m going to say that on the level 101 what’s a balance sheet, what’s an income statement. If you’re doing your own books, what’s the bank rec, if you’re doing your own books, look into ways to hire Bench or somebody else.
If you want a discount code, contact me I get a partner discount and instead of a revenue share, I just give it to the client because that’s more beneficial. So there’s lots of ways to tackle that problem. Certainly, understanding this other big concept, gross margin. Which even I have trouble communicating, but it’s this idea of how much money are you actually making?
Then after revenue expenses, time, and does the $10 increase in price really just mean $10 or does that increase your margin maybe 100%. So that’s something to consider quarterly. If you don’t know what quarterlies are, make sure you have those done. If you don’t have all of your deadlines burned into your brain, then now is the time to get flashcards out or write it on every single calendar you have, put it in your phone for the next 30 years you’re freelancing.
Q1 is April 15th, except this year, Q2 is June 15th. Q3 is September 15, Q4 is January 15th, and 99s are January 31st. April 15, is your personal deadline. March 15 is S Corporate Partnerships. Those you should be able to rattle off like I just did that and if you can’t, then now’s a great time to just burn them into your brain.
Is hard because people hire me to delegate a level of responsibility. But no matter what you’re always the taxpayer, and so you are accountable for late filings, penalties interest. The goal is to have some relationship with your accountant that you can have back and forth and there is an open line of communication. But if somebody is going to jail or is going to owe penalties for stuff, almost always is going to be you.
Willie Nelson is my favorite one. He opened up one of his chapters about owing millions of dollars in tax debt, because he’s like, “Oh, I just hired people to do it.” You still have to be engaged in this process.
Kai: So it’s not a turn cruise control on and catch a couple Z’s. It’s a hey, keep your hands on the wheel and make sure you’re pointing in the right direction.
Luke: Exactly. Mmhm.
Kai: This has been a ton of information, information that I am sorry to say I did not know but that gives me a plan for moving forward and making sure I do have the eyes dotted and the T’s crossed.
Luke: Totally. Absolutely.
Reuven: Luke, any last advice you would maybe suggest to people since we’re wrapping up?
Luke: Sure. I would say that if you haven’t read Company One, it was my favorite book of last year, for sure, I read a lot of books. Paul Jarvis even says in here that, ” I’ve always believed that good accounts should save you more money than they charge. This belief may be misguided, I have no studies or data to back it up. But nevertheless, my own accountant definitely does this.”
He has a whole section about, “An accountant is not just the person you talked to at the end of your business year when you file. You can use them as an advisor and all things related to government requests.”
As a CPA, it’s my responsibility to say actually, I can’t help you with that. I don’t know the answer. That’s part of what I’ve been saying this week. But I’ve been helping people digest some of it and navigate that. So if you have time, which I’m assuming you probably do now’s a wonderful opportunity to consider finding an accountant who works with you. Maybe in your state, maybe in your industry, maybe online. That will absolutely, at least calm some nerves around that.
Kai: If one of our listeners wants to check your services out or find out a little more about you, where’s the best place for them to go?
Luke: The best way to get in touch is just to go to timbertax.co and then right on the website, there’s a Book Now button and I’d be happy to jump on a call. We do have a blog, we have a Facebook as well. So I was doing a private Facebook group for clients only and I’ve switched that to be public. So Timber Tax or facebook.com/timbertax.co. Every Thursday today. Today’s Tuesday, what day of the week is it?
Every Thursday I do a live at 2 p.m. Pacific. So usually it’s about something I’ve encountered with clients and applicable to everyone. So if you catch it live, then I’m happy to answer it. I also post those videos to YouTube. On the Timber Tax channel, we have an Instagram as well with some helpful info including some recommended reading.
Kai: Nice. Great use of social media for a business that I would not think aligns with it. Well done. Well, perfect. Thank you so much, Luke. It was a delight to have you on and get a perspective on how to move forward through this.
Luke: Yeah, thank you. It was nice, good conversation. I appreciate it. If there’s anything that I can be helpful with, I really appreciate what you guys do, too. I know this is a very strange time and I really do believe that we’ll probably end up with more freelancers after all of this. This part of why I do what I do is because my first job out of college as the governmental accounting, I was fired from, and then even at Bench there was a reorg and weird thing and I was just like, “You know what? I need to be my own boss.” So a lot of people are going to come to the same conclusion. So this is important and helpful work.
Reuven: Did you just say that you were fired for being a government accountant?
Luke: Mmhm. Yep.
Reuven: Okay. Is there a good story for that? My impression is you go into government service and basically, you’re there for life unless you’re an ax murder.
Luke: The reality is I had just finished school and I decided to stay in Laramie, Wyoming where I went to university, and I made a bad decision as far as work. I was the one staff accountant at the city. As you can tell, I’m a little bit more about tech and innovation and interesting, so on. So it was just a very, very bad fit for me.
I literally had to handwrite paper journal entries. Get them stamps, enter them into Microsoft DOS, basically and then have a stack of journal entries, take them down to the basement, file them in this huge. So, the idea of web-based bookkeeping and this, it works a lot better.
Reuven: Wow, wow indeed.
Kai: That’s like something out of Brazil, the movie not the country.
Reuven: The movie not the country.
Luke: I don’t think I got that, what is that?
Kai: The movie by Terry Gilliam one of the Python folks Brazil, B-R-A-Z-I-L has a lot of scenes of like, “Oh, it’s just bureaucracy flowing and hundreds of thousands of pieces of paper.”
Luke: Yes, exactly, exactly. I’m pretty anti bureaucracy.
Meg: I got let go from a government job, went back, and then quit [laughs]. Similar reason and I was just like, “No, I’ve been off the boat, this boat turns too slowly for me, I’ve got to go back out.”
Luke: Exactly, exactly. Yeah.
Meg: Oh, dear.
Luke: Awesome. Well, thank you so much.
Reuven: All right. Thanks, Luke. All right, let’s wrap up this episode with picks. Kai, what do you got for us this week?
Kai: The number one I’d recommend. It’s a software service, You Need a budget.com. I’ve used it for probably six years now. I just love You Need a Budget because it makes budgeting so, so simple as on the individual side or as an independent business owner. I use it every day in my business and it gives me accurate measurements and accurate insight into my cash flow in my finances that I never had before. Strong recommendation.
Reuven: Excellent. Meg, what you got?
Meg: Mine I’ve got this week’s freedom.to. It’s a website and app blocker. I’ve only been using for a short time but it’s been really helpful in minimizing those distractions. You can either use it for scheduled sessions, for blocking out distracting websites or apps, or you can set just ad hoc sessions as you go and it will just prevent you from being able to go on Twitter when you should be doing something else or want to be focusing on something else.
So if you try to go on while you’ve got a session running it will just have this lovely thing pop up. “So you are free, the site is blocked. Go do something important.” It’s very helpful.
Reuven: That sounds amazing. For some people I know. Okay.
Reuven: Erik, what do you got for us this week?
Erik: I’ll do a couple. I recently got a present that is it’s called an Embr Wave. I do best and cooler in cold climates, so I get overheated a lot in the summer. It’s this personal cooling device and I’ve been trying it out for a couple of days. It actually does seem to make a difference. So it works, whether it’s for making you cooler or warmer depending on which thing you suffer with. So at least from my experience so far, it actually seems to be surprisingly effective for a little thing that goes around your wrist.
Then the other one is in the episode talking about Profit First, I’m not going to recommend that one already covered. But that same author whose last name, I also don’t know how to say, wrote a book called the Pumpkin Entrepreneur that I found to be a really good book.
So for those of you listening, who have clients, which is hopefully all of you, it’s a really good book about how to pick what are your best and more importantly, worst clients and how to turn all of your clients into your best clients. So that is definitely worth a read.
Reuven: Excellent. Jeremy, what do you got?
Jeremy: So as we mentioned in the episode, I’m a user of bench.co for bookkeeping services. I really like it a lot. It’s a more hands-off alternative to do You Need a Budget, depending on what your style is. So I highly recommend that to people that want more of a hands-off approach.
Then also The Independent Consulting Manual, which is a book that Kai and I both contributed to along with 12 other people. It’s a collection of our collected wisdom on how to structure freelancing and independent consulting businesses. It’s got a lot of great info we’ve just made it freely available at the independentconsultingmanual.com.
Kai: There’s no though there will have it in show notes.
Jeremy: Yeah, yeah, we’ll have it in the show notes. Anyway. Great Independent Consulting, there.
Reuven: Excellent. Fine read. I read it before when it first came out. Great stuff. For my pick, I’m going to recommend a relatively new book by Adam Davidson. He’s best known for founding Planet Money at NPR. He works The New York Times. He now works at the New Yorker. He’s done all sorts of stuff having to do with finance, journalism, and business journalism.
The guy really, really knows how to tell stories and explain things in a beautiful way. He came up with a book called The Passion Economy: The New Rules for Thriving in the Twenty-First Century. Wonderful, wonderful read, and not coincidentally dovetails with a lot of the advice we give on this podcast and that we suggest to entrepreneurs and freelancers about finding your niche and be unique and find your voice and you don’t have to cater to everyone.
But just like page after page of fantastic advice, insights, stories that he’s collected over the years, so a strong recommendation there. He also has a podcast. It’s for pay where he reads some of these re-talks, he does his radio journalism as well. The few that I’ve heard on the free sample are excellent, but the book stands alone on its own as well.
That’s our show for this week. Thanks so much to Kai, Meg, Erik, and Jeremy for joining me here. Thanks to Luke for being our guest, and we’ll see you next week on the Business of Freelancing podcast.