The “black hole” of finances

Or at least that’s what it can feel like when diving into your business’ finances …

If at the best of times you feel like you’re hanging on by your fingertips, then it can feel like you’re holding on for dear life when unprecedented circumstances hit, such as pandemics and recessions.

The reality is that knowledge of your finances can unlock so much more freedom as a freelancer or small business owner.

So, let’s dive into financial risk management. Here are ten risk management strategies you can start working on now to future-proof your small business.

Keep yourself ten steps ahead

Tip #1: Understand the difference between business and financial risk

It’s important to distinguish between business risks and financial risks, as each requires a unique approach. Business risk relates to whether you can sell enough and bring in revenue to cover all your costs (both directly related to delivering client work and your overhead costs). Financial risk relates to whether you can meet your financial obligations and pay off your business’ debts.

Tip #2: Prepare to think on your toes

Building your business is akin to sailing in unpredictable waters; you need a flexible and adaptable vessel to withstand the ebb and flow. Agility should be baked into every part of your business.

What could this look like for your business? It comes down to ensuring your resources and infrastructure are capable of shrinking or expanding.

For example:

  • You could work with contractors instead of hiring employees, which eases the regular demand of payroll on your cash flow if there’s a slowdown in client work.
  • You could choose to work from home instead of committing to an office lease.
  • You could leverage tools like a Billable Rate Calculator to help you continue to optimize your rate over time.

Tip #3: Identify your ‘big picture’ vision and proactively map to it

As a creative agency owner, achieving your business vision can often seem light years away. The reality is, everything you’re doing right now is inching you closer, or further, from that goal.

How can you bring this vision to life and ensure that it withstands turbulent waters? It starts by creating a financial roadmap and understanding pricing profitability. The roadmap will help you anticipate future financial situations and influence them before they become a problem. Profitable pricing will ensure that you have money to reinvest in your business to hire support, bring in experts, outsource, and gain capacity to grow your business, all of which can help you get to your goal faster.

Tip #4: Know what your back up cash plan is

Preparing an emergency fund (such as personal savings, asking family or friends, or bringing in more revenue via client work) or having a readily accessible line of credit is a great way to plan for high-risk situations and financial stress. It’s wise to get your hands on money before you need it because banks don’t generally like to give it to you when you DO need it!

Knowing what will provide your financial cushion will help you bridge the gap during tough times and provide a financial lifeline that could mean the difference between staying open or having to close.

Having this cash readily available is not just a safety measure, it’s an important part of financial risk management.

Tip #5: Adhere to financial best practices

There are many things creative business owners should be doing but often just don’t know! Don’t kick yourself for this. You wear a ton of hats and there’s no textbook for entrepreneurship.

Some best practices to start implementing include tracking what’s called burn rate and maintaining operational cash reserves, which is the cash you need to keep the “lights on” if no new cash is coming in from selling your services.

Work towards having three months of operational cash saved for emergencies and aim to have no more than 40-60% of your revenue go towards paying for your direct costs, or the costs associated with actually delivering work to your clients.

Collect good information to make good decisions

Tip #6: Understand the “financial flow” of your business

This one requires you to dive into the black hole of your finances. As a freelancer or small business owner, you can work step by step towards understanding the ins and outs of your business and the potential impacts of any changes. To set expectations, understand this probably won’t happen overnight and you’ll likely need some ongoing support.

This is where your financial roadmap comes in. It allows you to create good, better, best-, and worst-case scenarios (e.g., What if revenue skyrocketed? What if it’s hard to hire? What if a recession happens?) and preemptively make plans for each situation.

Tip #7: Implement cloud software tools

It’s now easier than ever to get your hands on timely and accurate data.

With the right financial tech stack – from accounting, invoicing, and project management to e-payment and payroll software – in place and consistently using them, you can monitor critical financial metrics, including:

  • Cash on hand
  • Cash burn rate
  • Average days to collect accounts receivable (how quickly your clients pay you)
  • Number of days until accounts payable is due (how quickly you need to pay subcontractors/vendors)

Entrepreneurship takes a village

Tip #8: Source a second opinion before you act

When things get heated, it can be tempting to rush into action. If you run your creative business solo or with a small team, you may be used to making rapid fire calls on your own.

Reaching out to a circle of people you trust is a good way to pump the breaks and recenter yourself before you make a rash financial decision. These people can be advisors, fellow entrepreneurs, or other third-party sources you go to for the latest info and insights. Good information and a fresh perspective will work wonders as you weigh out your options.

In the digital age, a plethora of online resources are readily available to help businesses. Even if you’re still working on building your network, there are a ton of resources you can get your hands on for free.

Tip #9: Embrace lifelong learning

There is no way you can know it all, all at once.

Whether you sign up for a program geared towards freelancers and small business owners, block time to attend an online webinar, or even carve out some time to read, this is all bulking up your entrepreneurial toolkit.

Tip #10: Connect with a mentor or business advisor

Finding a trusted advisor who has “been there and done that” is one way to access first-hand advice on risk management (both business and financial). There are so many seasoned business advisors who you can hire or programs you receive mentorship through.

If cash is tight, you could also directly ask another freelancer or small business owner you admire if they are open to mentoring you!

A quick reminder that you don’t need to implement all ten tips at once. Just pick one to start with!

You can also connect with a Business Link Strategist to get your burning questions answered and set your business on the path to success with free in-person or virtual advice.

Jacinthe Koddo

Business Owner, Koddo & Co.

Jacinthe Koddo is an Alberta-based financial educator and fractional CFO. As an interior designer turned serial business owner, Jacinthe has learned the ins and outs of small business finance since 2009. She is now on a mission to increase financial literacy for freelancers and creative agency owners by shedding light onto the black hole biz finances from pricing profitably to boosting cashflow.