Accounting Guide for Consultants

As a consultant, you’ll know the importance of partnership and working closely with a business to help improve its operations and efficiency, with the goal of growth and positive momentum.

You’ll also know that this growth and positive momentum is benefited by a solid financial foundation, not only for the business you’re consulting for – but also your own.

Here at CloudAccountant.co.uk, we work closely with all types of businesses, including consultancy businesses, to provide that partnership and support when it comes to managing your accounts.

In this article, we aim to shed light on how a cloud accounting solution can simplify and enhance the fiscal management aspects of consulting work.

Maintain good financial records

One of the best ways to ensure success when it comes to the management of your accounts, and in claiming back anything that you’re owed, is to maintain good financial records. This includes tracking your income, expenses, and overall profitability with precision.

This visibility of what you’re bringing in and what you’re spending is not only beneficial for the vital day-to-day management of your consulting business. but also has an important role in setting rates, budgeting, and identifying areas for potential cost savings.

What finances should be tracked as a consultant?

As a consultant, there are a few different types of finances that should be tracked. The first of these is business expenses.

Business expenses

It’s important to track business expenses as a consultant because many of these costs could potentially be tax-deductible. This means that a portion of what you spend on certain business necessities can be subtracted from your taxable income and lower your tax bill. However, it’s important to keep in mind that tax laws are subject to change, and not all expenses may qualify as deductible in the eyes of the tax authorities.

That’s why it’s advisable to work with a professional accountancy partner such as us. We have experience dealing with consulting businesses such as yourself, and can help you identify which expenses are legitimately deductible and how to properly document them. Here are some common examples of business expenses that consultants often find to be tax-deductible:

• Insurance fees
• Software fees
• Tool fees
• Travel expenses
• Office supplies and equipment

For a more comprehensive list on what can be claimed, you can view our guide to business expenses.

Income and outgoings

Understanding your income and expenses as a consultant is crucial for financial health, strategic planning, and decision-making. Accurate records of income, expenses, and investments help manage cash flow, identify cost-saving opportunities, and assess profitability for a consulting business.

From a legal standpoint, accurately declaring your income to HM Revenue and Customs (HMRC) is not only mandatory but a fundamental aspect of operating within the bounds of the law. Failing to report your income correctly can lead to penalties, fines, or even more severe legal consequences. By ensuring all your financial activities are transparent, you safeguard yourself against potential legal issues. This level of professionalism and adherence to legal requirements not only protects you but also builds trust with your clients and stakeholders.

Ensure you are correctly budgeting and forecasting

Budgeting and forecasting are crucial for consulting businesses. Budgeting helps create a financial plan for income, expenses, and profit, enabling efficient resource allocation. Forecasting predicts future financial trends based on data and research, ensuring business sustainability and growth.

How to budget as a consulting business

Budgeting correctly as a consulting business begins with setting clear financial goals that are both ambitious and attainable, aligning them with the business’s strategic objectives. This involves assessing past financial performance, understanding current market trends, and anticipating future income and expenses. Realistic budgets will allow you to allocate resources more effectively, prioritise spending, and minimise unnecessary expenses.

A well-structured budget enables you to adjust as needed. Adapting the budget in response to changes ensures that the consulting business remains agile.

How to forecast as a consulting business

Forecasting for a consulting business involves regularly comparing actual financial performance to budgeted figures helping identify variances and informing adjustments to strategies for better alignment with financial goals.

Ensure you are properly time-tracking

Proper time-tracking is fundamental for managing projects and client relationships effectively. It ensures that clients are billed accurately for the time spent on their projects, aligning with the pre-agreed hours, and avoiding any potential disputes over billing. This approach not only builds trust between service providers and clients but also safeguards the integrity of the business.

Time tracking goes beyond billing accuracy, it allows better scheduling, resource allocation, setting realistic timelines, and evaluating project profitability to guide pricing and service offerings.

Cloud accounting software like QuickBooks enhances the efficiency and accuracy of time tracking. QuickBooks offers a suite of features designed to streamline the time-tracking process. Users can easily assign their time to specific clients, projects, and tasks, ensuring that every billable hour is accurately captured. It also provides robust reporting capabilities, allowing businesses to generate detailed reports on the time spent on various activities.

 Cloud accounting software like QuickBooks is an indispensable tool for businesses looking to optimise their time-tracking practices, enhance project management, and improve overall efficiency.

Make your billing process more efficient

An efficient billing process is crucial for business cash flow, minimising delays in payments. This rapid billing process also reduces billing errors, builds trust with clients, and ensures timely and accurate payments.

Incorporating cloud accounting software with integrated project management capabilities can significantly streamline the billing process, making it more efficient and less time-consuming. This modern approach to bookkeeping for consultants allows businesses to generate invoices easily, ensuring that all billable work is captured and billed accurately. An automated invoicing process minimises human error and ensures that invoices reflect the correct amounts for services rendered.

Here are a few ways in which cloud accounting software with project management integration can benefit your business:

• Create invoices easily: Create invoices within the project management platform to track billable activities efficiently.
• Invoice clients accurately: Automated systems accurately track time and expenses to ensure invoices reflect the work done.
• Get paid quicker: Clients can improve cash flow by settling invoices promptly using online payment options.

Paying taxes as a consultant

How much tax do I pay as a consultant?

To calculate consultant taxes, consider factors like income, allowances, deductions, investments, and additional income to determine taxable income and applicable tax brackets based on income ranges and tax rates.

The tax system is divided into three categories based on income and tax rates:

• Those earning below the personal allowance threshold pay no tax.
• The basic rate of 20% applies to earnings above the personal allowance.
• High-income earners fall into the 40% or above tax bracket.

This system aims for fairness by taxing individuals according to their capacity to contribute.

How to calculate the amount of tax I’ll pay as a consultant?

To calculate taxes as a consultant, deduct allowable expenses from income to find your taxable income. In a scenario with £20,000 income and £5,000 expenses, taxable income is £15,000. Tax owed depends on the tax bracket, e.g., 20% means owing £3,000 on £15,000 income. Accurate income and expense tracking is crucial for tax calculations.

Filing tax returns punctually is essential for consultants to avoid fines and manage finances effectively. Here at CloudAccountant.co.uk, we can assist in organising records, ensuring tax compliance, and optimising tax responsibilities.

What if I have other incomes?

When managing finances for your consultancy, consider how extra income streams impact tax liability. All income sources must be reported together, potentially pushing you into a higher tax bracket and increasing taxes owed. Plan income and taxes carefully to maintain profitability.

Entering a higher tax bracket from combined incomes can affect tax deductions and credits, impacting take-home income. Tax planning and tax-efficient investments can help manage tax rates and preserve earnings.

Hire an expert

Hiring an expert to manage consultant accounting can take away all the stress and ensure that everything is taken care of properly. It’s important to ensure that you’re hiring the right accountant for your specific needs.

A cloud accountant manages your accounting needs remotely and provides real-time updates on your financial situation. This is especially helpful for small businesses or individuals who may not have the resources for an in-house accountant.

Why choose CloudAccountant.co.uk

Choosing an accountant with knowledge of the industry gives you peace of mind and allows you to spend your time focusing on growing your business. 

Our friendly team have years of experience working within the consultants and consultancy businesses. You’ll benefit from our specialist technical expertise and receive support relevant to your sector, such as legislative changes and reporting requirements.

Our award-winning cloud accounting software will give you the tools to cut down on admin time, monitor cashflow, and manage your business from anywhere.

If you’re considering switching accountants, we make the process simple. Our dedicated team will guide you through the process and ensure a seamless transition.

Get in touch!

Need more information on accounting for consultants? If you’d like some free, impartial advice on how we can proactively support your business with all your accountancy needs, accurately and on time, you can contact us by emailing info@cloudaccountant.co.uk, calling us on 01625 546232, or simply filling in the enquiry form below.