Expenses fall into three classes - indirect, direct and reimbursable. Here are some examples of each class:
INDIRECT - rent, phones, insurance, payroll
DIRECT - consultants, payroll
REIMBURSABLE - reproduction, travel, delivery, sometimes consultants
Indirect Expenses can be thought of as expenses you will have whether you have any projects or not. It is ideal to keep expenses in this class to the absolute minimum. Since you don't operate on tax revenue like the government or on a venture capitalist's investment in your firm; when the work load gets light, you may be paying for the indirect expenses out of your own pocket. Pay these expenses promptly when they are due to protect your credit rating. Clients that don't know you may check your Dun & Bradstreet report. A bad report can scuttle your chances because as one client told me, "Company policy is to run the report on new vendors. Once we see bad news, no matter what the excuse is, how do we explain to 'corporate' that we ignored it."
Payroll is technically split between indirect and direct expenses according to whether the time was spent on a paying client's project or not. However you will need to pay your employees whether you have been paid by clients. Tactically you are better to run your office 'about-one-employee-short' to keep the burden of light work loads and slow-paying clients under control. Use comp-time or overtime instead of extra people.
Direct Expenses are expenses you only have because you have a project; but you do not bill separately for them. Consultants that are included in a lump sum fee are direct expenses. Pay these expenses when you are paid. Keeping track of these Accounts Payable is the forte of the more sophisticated bookkeeping systems. Keep your system simple until you can afford the professional software and the person to run it. Payroll was addressed above; however, you should track time spent on project work so that you have a basis for estimating fees in the future and for determining what work is profitable.
Reimbursable Expenses are project-related like direct expenses, except that you bill for them in addition to your fee. Pay these expenses when they come due, except for the consultants, who you can pay when you are paid. When these expenses arrive, make sure you also log them into your invoicing system so that you are reimbursed for them.
Now that we have covered money coming in and money going out, next is a Simple System for tracking the money in Part 3.