Accounting for consultants: how to get it right

Accounting is part of the job when you run a business, but if you’re a consultant, it comes with a few extra twists. From tracking billable hours to managing multiple clients and irregular income, things can get messy fast.

So what makes accounting for consultants different? And how can you set up systems that actually make your life easier? Let’s break it down.

How accounting differs for consultants

In consulting, your time is your product, which makes your bookkeeping needs pretty different from a business that sells physical goods. 

While ecommerce bookkeeping is all about managing inventory and tracking product costs, consultants have a different challenge: keeping tabs on hours, managing multiple projects, and figuring out which clients and services are actually worth their time.

That’s where project-based accounting comes in. By tracking your income and expenses by engagement, you can see profitability of specific clients and strategically set up your service offerings. It’s a powerful tool but it’s not always easy to set up.

For starters, you might bill a client long after you’ve started (or finished) the work, which makes it tricky to match revenue and expenses in real time. 

And if you’ve got a team? Allocating each person’s time across multiple clients, especially when some hours are billable and others aren’t, can get complicated fast.

Getting the right system in place can be a game changer, but it’s not a one-click setup. It takes time, effort, and a little financial finesse to build a system that’s accurate, timely, and useful.

Accounting for consultants basics

Bookkeeping

Bookkeeping is the key to keeping track of your business’s money: what’s coming in, what’s going out, and where it’s all going. For consultants, it’s the starting point for everything else in accounting, helping you do things like:

• Project profitability analysis
• Cash flow management
• Estimated tax planning

To keep up with the pace of consulting work, your bookkeeping system needs to be flexible. It shouldn’t just track income and expenses—it should also let you connect them to specific projects or clients so you can get a clear view of how each engagement is performing.

Software like Zeni, QuickBooks, and Freshbooks can help streamline many routine bookkeeping tasks, including categorization and reconciliation. In addition, they all allow you to tag transactions, helping you structure your books around your actual workflows.

However, no software is capable of managing your financial reporting without any human support. Whether you hire an external bookkeeper or manage it all yourself, some level of personal oversight is necessary to facilitate the accounting process.

Zeni’s platform offers an all-in-one outsourced accounting service. Our subscriptions combine AI-powered software with a team of professional bookkeepers, ready to provide guidance and support whenever you need expert advice.

Tax considerations

Tax planning is another fundamental part of accounting for consultants. You may not need to worry about sales taxes since consultants typically don’t offer physical products, but there are still significant responsibilities to manage.

For example, you still need to navigate:

• Picking a small business structure: Your choice of legal entity, such as a sole proprietorship or S corporation, significantly affects how your business income is taxed and how you can structure your organization’s ownership.
• Calculating tax-deductible expenses: You must keep careful records of your business expenses and be prepared to justify them as being both ordinary and necessary for your consulting services.
• Filing timely annual returns: In addition to your personal state and federal tax returns, you may need to file a separate return for your consulting business, depending on its entity structure.

One area where consultants often run into additional challenges is with estimated taxes. Since consulting income often varies throughout the year, it can be tricky to determine how much to pay throughout the year.

If you want to protect your cash and steer clear of tax penalties, the IRS safe harbor rules can help. As long as you pay either 100% of last year’s tax bill or 90% of what you owe this year, you’re in the clear.

Invoicing and billing

Invoicing and billing are also critical aspects of accounting for consultants. After all, it’s how you get paid for your professional services. However, it can be a delicate balance to protect your cash flows without jeopardizing your client relationships.

Consultants often use a mix of billing structures, such as hourly, milestone-based, or fixed project fees, each with its own implications for your cash flows and your clients.

For example, milestone billing can help you secure cash upfront and throughout a project, protecting you from delayed payments. However, it can also scare away potential clients or require additional negotiation that slows down engagements.

As a result, your consultant business needs an invoicing system that can support flexible billing structures and facilitate cash flow tracking and analysis. Ideally, they should also integrate with your other accounting tools.

Fortunately, many bookkeeping solutions have built-in features designed to help you manage your billing. For instance, they often allow you to create and send invoices, schedule recurring bills, and track the status of each payment.

Zeni’s AI-enhanced platform includes integrated bill pay features with real-time tracking capabilities. You’ll also benefit from $0 ACH fees when you use one of Zeni’s checking accounts.

Payroll and time tracking

We’ve already established how important time tracking is for consultants, especially when you have employees beyond yourself. 

In addition to informing your payroll, tracking things like billable hours and utilization impacts your project-based accounting.

As a result, it’s essential to build time tracking into your team’s workflows and emphasize the need for accurate reporting. Consider designing policies that reward honest numbers, as it’s easy to incentivize fudging them one way or another.

For example, punishing low utilization rates too harshly may encourage employees to overreport their billable hours, disrupting the accuracy of your financial reports. If that informs your pricing, it can even affect your relationships with your clients.

Again, a time-tracking tool that integrates with your payroll and accounting solutions is ideal, saving you from moving data around manually. However, ease of use is also essential, as your team is more likely to do their part when the system is intuitive.

If you can’t find an accounting platform that does everything you want in one place, you can often use Zapier to connect additional tools that facilitate any missing features.

Financial statement considerations

Financial statements are the ultimate product of your accounting function. The balance sheet summarizes your financial position, the income statement details your financial performance, and the statement of cash flows organizes your cash activities.

All of these financial statements are critical for financial planning and decision-making, including everything from prioritizing projects to preparing your tax returns.

Most modern bookkeeping tools automatically handle financial statement preparation using the transaction data in your general ledger. However, additional work is typically necessary to make them useful, especially with a project-based system.

While a bookkeeper can handle the basic steps involved in cleaning up your initial books, you may need a more knowledgeable accounting expert—such as a Certified Public Accountant—to get them where they need to be.

For example, in addition to ensuring everything is accurate, Certified Public Accountants can help organize your financial statements in a way that aligns with your goals and extract more meaningful insights from them.

For consultants, that might mean helping you separate your revenues and expenses by engagement and identifying ways to improve your operation’s profitability.

Without that level of expertise, you risk basing your decisions on flawed or incomplete data. In addition to tax and other compliance issues, that can lead to poor cash flow management, missed opportunities for growth, and uninformed business decisions.

Consulting accounting software

Let’s be real, manual accounting just doesn’t cut it anymore. With so many powerful tools out there, doing it all by hand means wasting time, risking errors, and making life harder than it needs to be.

The tricky part? Figuring out which accounting software is right for you. With so many options, it’s easy to feel overwhelmed. Here’s how to narrow it down and find the best fit:

• Evaluate price versus value: Beyond the cost of the product or subscription, consider how much time, labor, and stress each tool could save your consulting firm to assess its true value.
• Leverage others’ experience: Referrals from other consultants and reviews from previous users can be an excellent source of insight into a solution’s real-world performance.
• Prioritize key integrations: The best tools fit seamlessly into your existing tech stack. Ideally, your accounting, time tracking, invoicing, and payroll systems should all integrate with each other.
• Consider your team’s needs: A tool is only effective when your team embraces it, so choose software that makes their lives easier. If you have to make a disruptive change, offer training and resources to smooth the transition.

Some great places to start looking for consultant-friendly accounting software include Zeni, QuickBooks, and FreshBooks. However, the best solution is the one that works for your business’s specific needs, not necessarily the most recognizable name.

Use Zeni for consultant accounting

Zeni is your all-in-one solution built for consultants—no more bouncing between tools or providers. With everything you need in one place, managing your finances just got a whole lot easier.

For example, our platform includes:

• AI Bookkeeping: A blend of automation and expert oversight keeps your books accurate, organized, and up-to-date in real time.
• Bill Payments: Track, schedule, and pay your bills with automatic bill capture, free ACH transfers, and automated approval workflows.
• Employee Reimbursements: Handle reimbursements directly from your accounting software and benefit from free, same-day ACH payouts.
• Business Checking and Credit Cards: Leverage built-in financial accounts that integrate with your accounting system and earn lucrative rewards.

Need more support? You can easily add tax prep, payroll, or even a fractional CFO to help tackle whatever financial challenges come your way.

Plus, Zeni’s platform is powered by AI—so you’re not just getting faster books, you’re getting smarter insights and next-level automation. It’s more than software. It’s your full-stack finance team, all in one place.

Ready to make accounting the easiest part of your consulting business? Try Zeni today.