In my experience working with micro businesses here are the top signs to look for:
The wolf is at the door
Cash flow is not coming through to meet your income needs or supplier commitments. In this scenario the first port of call is to check for common points of failure such as sporadic invoicing and rising costs associated with service delivery. Look at the aged collection of your debtors – in general over 70 per cent should be paying within 30 days. If that’s not the case, consider a better system for managing billable hours and invoices. Affordable cloud-based systems like Xero will even allow you to automate invoicing for jobs that have regular periodic fees. You could also consider incentivising clients to pay earlier by offering a discount or value-added services.
Fighting a losing battle
You’re working harder than ever but not making the financial gains you expected. A clear business plan with a budget that helps you compare anticipated revenue with actual results will highlight where things are going wrong. Changes in technology or market expectations may mean it is costing you more to service your client base. Or you may be taking on unprofitable work by pricing jobs too low or failing to factor-in accurate figures for billable hours or input costs.
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Blending personal and business finances
The flexibility to combine work and personal life is one of the great benefits of being a soloist. The same can’t be said for your financial affairs. For one, the tax office won’t do you any favours if you can’t accurately detail the percentage of vehicle costs, home utilities and other home office costs that are directly related to the operation of your business. Paying business income directly into your personal account is also a sure-fire way to lose track of your finances, running the risk that you’ll come up short when quarterly payments like GST or PAYG are due to be paid.
The law of diminishing returns
Sometimes I meet clients who think of themselves as soloists, but one look at their financials tells me they are already running a bigger operation. They might be performing well, but without growth – this level of performance will gradually decline. If this is your situation it’s time to consider if you want your business to grow, and if so, how you want it grow. At this point seeking advice to ensure you have the optimal business structure in place is important. It could dramatically impact how much tax you pay and your ability to finance business expansion.
How can you tell when your small business finances are unwell? How do you go about improving them?