I know you are excited! You have landed a new contract and your client has agreed to pay you $5000 per month to create and run ads for him on social media. Only $2000 of the $5000 is your management/consulting fee for the work that you will do and the other $3000 per month is for ad spend with Facebook, Google Adwords or some other platform. With the technology available these days it is likely that the funds have been directly deposited into your bank account. So, how are you going to keep track of the actual revenue you have earned for your services separate from the money that has been provided for ad spend? Wouldn't you agree that the entire $5000 is not income for your business? Who wants to claim extra income and pay taxes on money that does not belong to them?
Maybe you've encountered a situation where your client wants you to show proof that you are actually spending $3000 per month on ads and not "pocketing" the money that they are providing you to bring awareness to their business and increase their sales. Do you currently have any documentation to share with your client to prove that you are following the terms of your contract? Wouldn't it be great if you could simply run a report to prove what the funds were spent on?
We know that things can get messy in a situation like this, so we are going to share with you how to keep your client's trust when handling client ad spend and help you avoid reporting more income than you have actually earned using Xero accounting software.
Open a Separate Checking Account
First things first, right? The number one way to avoid losing your client's trust and ultimately your client is to open a separate checking account to "hold" the client's money to be used for ad spend. "But my client only sends me one payment for both, not two separate payments so how would I handle to deposit," you may ask. We recommend that you have the entire deposit go into the account that you will be using for and keeping track of the ad spend, not your operating checking account.
Classify the Money Received as a Liability
This deposit should be classified as a prepayment. A prepayment simply means money paid in advance to be used at a later date. Keep in mind that part of this money does not belong to you. If the funds are not spent you will likely return the money to the client so you will want to track these funds in a current liability account. You can label this account as "Client Ad Spend". Use the client's name in the "Received From" field. For batch deposits, make sure you record each client's payment separately so that you are able to track each client's balance individually.
Create an invoice for your services provided. Using the example above, you would then transfer the $2000 from the Client Ad Spend account to your Operating account to pay yourself and recognize the revenue that you have earned. The client would then have a remaining balance of $3000 to pay for ads.
Payments to the vendors for purchases of ads should be made from the Client Ad Spend account. When ads are purchased on behalf of a client you would reduce the client's prepayment balance in Xero by the amount that you spent on ads. Each time you spend money on behalf of the client for ads you would reduce the prepayment by that amount. This will allow you to track how much you have spent on each client and how much money the client still has available for ad spend.
Save Yourself from Future Headaches
Yes, this adds an extra step to your bookkeeping process, but it will prevent you from having headaches in the future because funds have been comingled. You will be able to have a more accurate picture of your finance because the only funds available in your Operating account will be funds that are available for you to spend operating your business or compensating yourself for your work.
Following this process has several benefits.
Prevent overstating your income and expense by keeping funds available for client ad spend separate from funds you have available to operate your business.
Accurately track client ad spend balances so that you will stay within the clients budget and not spend more than the client has available and will use what the client has available to help the client reach more potential prospects.
Maintain the client's trust because you have "proof" of what the client's money has been spent on and can show the client that you used the funds in the manner that was intended.
We understand that bookkeeping may not be your specialty and how important it is to keep accurate financial records. If you are interested in using this system for your business and need assistance setting up your accounting software, training, or are interested in outsourcing this responsibility schedule a call to discuss how we can work together.