Overcoming a fear of finances
Paul Boag
It took me 13 years of running a business before I finally overcame my fear of finances. In fact, that fear almost prevented me from pursuing the career that I wanted.
For 13 years I ran an agency with two co-founders, but about a year ago I decided I wanted a better balance between work and life. I decided I wanted to strike out on my own, but “the numbers” held me back.
For years my business partner had looked after the finances. Unfortunately the rows and rows of data in his carefully-crafted spreadsheets completely overwhelmed me - the idea of having to manage all this on my own stopped me dead in my tracks.
A fear of finances is understandable, but I’ve learned that avoiding your business finances can have some real consequences for you and your business:
In short you are out of control, and if you are anything like me that is scary. I overcame my fear once I discovered that spreadsheets weren’t the only way to manage my business finances. I now use FreeAgent, and have a completely different outlook on “the numbers”. Every business decision I make, large or small, is now backed by an awareness of how my business is performing. I also know how much I can expect to earn in the coming months. It is such a relief and it has enabled me to live the life I wanted.
Here is a quick run-down of some of the key numbers I use to feel confident about my business’s direction.
The four numbers that help me stay in control
When I’m looking at my business finances, I have two big priorities: I want to make confident business decisions, and I want to reduce my worry as much as possible.
1. Retained profit
What it is: The retained profit figure tells you how much money your company would have left if you stopped trading today, sold the company’s assets, collected outstanding invoices and paid all its outstanding debts. This is also sometimes called “retained earnings”.
Where to find it: You can find your retained profit figure at the bottom of your Profit and Loss report. If you have an accountant, this will be part of the reports that they produce for you and your accounting software will produce this report as well.
How I use it: For me, freelancing is just as much about saying “no” as it is saying “yes”. Using the retained profit figure is the key way that I help myself say “no” to projects that either don’t appeal or are just wrong for my business. It’s hard as a freelancer to turn down work if you don’t know how much money you can expect to flow in and out over the next few months. That is why I love this figure. I think of retained profit as my “cushion”. If it’s at a level that I’m comfortable with, I can decline work or take a break with a lot more confidence. As soon as it starts to dip below a certain level, I know it’s time to double my efforts in promoting myself and my services.
If you are a director of a limited company like me, retained profit is important for another reason: it tells you how much money you can take out of the company! Your company’s retained profit represents the most you could withdraw as a dividend. If the number is negative, you shouldn’t withdraw a dividend at all.
Here are some of the questions that the retained profit figure can help answer:
Things to look out for: The retained profit figure doesn’t just include your cash balance, but also any assets that you have invested in. That means that if you just bought a new
laptop or other large asset, this figure is assuming that you would sell it at its second-hand value. This confused me for a while as I would never consider selling any of my precious gadgets!
2. Aged debtors report
What it is: The aged debtors report tells you how much money that you have invoiced, but have not yet collected. The aged debtors report usually groups the amounts in 30 days, and shows the invoices that are aged 30 days past the invoice date, 30 to 60 days, 60 to 90 days, and more than 90 days.
Where to find it: The aged debtors reports is part of the standard set of accounting reports that an accountant or accounting software would prepare for you.
How I use it: I use this report to get a quick view of how much money I should expect to come in over the next month or so. This helps me to stop worrying about where my next meal is going to come from. Ideally, there shouldn’t be any outstanding unpaid invoices that have turned red in FreeAgent. But if any are lurking around, that’s an excellent sign that I should be chasing payment. Here are some of the questions that the aged debtors report can help answer: