Episode 101: The Financial Red Flags Every Creative Business Owner Should Be Watching For

Hello and welcome back to another episode of Creative Minds Smart Money. And today we’re talking about financial red flags that every creative should know. So there’s obviously a variety of financial red flags that we need to kind of go over and things that we need to talk about. But we really want to dive into these specifically. So what does it actually mean for a business to have a red flag? Well, it’s not anything negative if you’re thinking that. It’s just something that maybe you haven’t looked at or something you maybe haven’t caught. So a red flag is usually something where it’s like, hey, we need to look at this closer, or maybe you need a little help, or maybe you just haven’t noticed this yet. That’s something that we need to fix like right away. So usually it’s like those, it’s like if you were driving down the road and your engine light came on, right? This is that engine light. This is saying, hey, we need to check up on this.

There are so many creative business owners who don’t notice a lot of these red flags until they’re so bad because they’re so busy running their business and doing what they do best, which is creating, that they aren’t able to see kind of what’s going on in their business.

I don’t even know how to describe it. They just aren’t able to see the full picture. So there’s so much behind everything and that goes into all this data and they just aren’t able to see the full picture because they don’t know and they might not know. Because again, as I said in our last episode with our 100 episode celebration (100 year, oh my goodness, if I’ve been doing this podcast for 100 years, that’s wild), I think there’s just so many things you just don’t notice you don’t know. So you didn’t have that education. So how would you know to look at it otherwise?

So let’s talk about a few of those today. The first one I want to talk about is obviously the revenue trap. Now I want to be clear on this. A lot of you who have listened to this podcast already know that the most important number that you need to be looking at is profit, not your revenue. However, there was a study that was done recently by one of the ladies who was on this podcast, I think her name is Jess Creatives. And it was about how many people know, she actually responded to someone else who did this study, it was not her, there was a study done about how many people knew what number to look at. So they presented them with a list of numbers that you should look at and they said, what is the most important number that you should be looking at every month? And I think it was 14 percent. Only 14 percent of people actually said profit.

Most of them said revenue. Now, revenue is such a trap, obviously, because revenue is your top line number. It tells you nothing about your business other than how much money you brought in during the last month. But that money’s not in your pocket. And that money is definitely not what you have in your bank account. So now growing revenue is not always a sign that things are going well. Why not? Because you could be making more and more money, but if you’re not understanding what’s going out of your business, then you could just be hurting yourself more because you could be spending more than you’re making. You could be having a lot of money coming in, but you’re not solving the deeper problems that are going on.

There’s tons of warning signs about this too. The warning signs behind, you know, when you’re booked and busy and you have a great month, like what are the warning signs behind why you have a higher revenue, but you’re not feeling like you are actually making more money. And I think the biggest one behind this is definitely the revenue’s up but your profit isn’t. So last month you made 10,000, but you only kept a thousand. This month you made 15,000, but you only kept a thousand of it. You kept the same amount, but you made more, which means you spent $5,000 more this month than you did last month.

So if you’re fully booked and you have a really packed schedule but you still feel broke and you still feel like you can’t afford to pay for things, you can’t afford to do things in your business. And then of course your income is inconsistent month to month with those safety nets. So the revenue trap there in of itself is that you’re only looking at the bigger picture and you’re not looking at everything that falls underneath. You’re not looking at your subscription costs. You’re not looking at your contractor and employee costs. You’re not looking at the whole picture and deciding based on that.

So maybe you got a new client that is that $5,000 client that took you from the 10,000 to 15,000. And instead of actually analyzing what you can do with that money, you just automatically were like, oh my gosh, I need a new desk, I’m going to spend on a new desk. And all of a sudden you’re left with that thousand dollars at the end of the month. And now you have more bills that need to be paid, but you already did that. So the revenue trap is just looking at that bigger number and not analyzing every little thing and the understanding that comes with that.

And we’ve talked about this very thoroughly in a lot of other episodes where you need to be looking at everything, not just your revenue. You need to be understanding what’s going out of your business and how that impact will happen over the next month or the next two months, not just what’s going to happen in the next week. Because if you don’t know if you’re going to be making more money within that month, you’re spending money that could potentially be allocated towards bills that would make you feel comfortable and safe next month that are now going to leave you feeling scared and worried about your future.

So that’s the difference there. And I think that emotional difference is you needing to decide if you want to feel comfortable and safe or if you want to feel scared and nervous and if you’re going to make it next month. So that’s one of the biggest things.

Now, obviously there are some cash flow red flags. So kind of float right into that. We have our revenue and then we have our cash flow red flags. So unhealthy cash flow in a business is where we consistently are spending more than we are making. Now, obviously there are weeks, there are weeks in a month where we will be spending more than we have money coming in. But your month should consistently either be growing your bank account or at least breaking even. There should be no eating into the negative, there should be no dropping to zero. There should be at least a consistency where we are either breaking even or having a little bit more money entered into our account, depending on how we have things going.

And sometimes it’s even better to have a lot more money going into our account because then we can plan with things a whole lot better. But definitely unhealthy cash flow is just having that consistent drop into zero, drop into a negative number in any given month or any given week. You know, and I think that’s important. It’s not just in a month, but in a week. If you are having three weeks in a row where you’re at zero dollars or you’re at negative in your bank balance, that’s a problem. That’s something we really need to look at.

What should you be paying attention to beyond your bank balance is obviously again, what’s coming in and out of your business. So actually knowing what’s coming in and out of your business, but then knowing your cash floor. Now I have a free resource for this. It is a very basic cash flow forecast, essentially very basic of what me and my clients do together, but it gives you at least some idea of what your cash floor is. Your cash floor is a number that your bank account should not fall beneath. So it shouldn’t fall below that number ever. Even if you have expenses or things like that, your goal is to keep it at that number.

So beyond your bank balance, it’s looking at your expenses and looking at your income and looking when those things hit. Not looking at them just as a whole, looking at when those things hit and analyzing them. So again, if you’re consistently running out of money before the next income clears, that is a red flag because you don’t have the money to fund things that are going on in your business, or you’re spending money before you actually have that money hitting. So being able to plan in between those invoices is very important.

And then relying on credit cards to cover operating expenses. So yes, credit cards are great. I don’t think that’s anything that we need to really go into. I personally, I don’t like using a credit card in my business, but there are many businesses who do use credit cards and they’re great for expenses. But the problem becomes when people just leave them. So people are having their credit cards and they’re just spending, spending, spending. They’re not paying them off. I have one client that we work with. We have a limit on her card. She has like a $20,000 limit. We’re like, we’re going to put you at like, we want to keep it $5,000 or below every month. That’s our goal. If we go over, it’s fine. But our goal is to keep it at like $5,000 or below.

Now our goal every month is to make sure that that card is paid off so that we’re not having any interest. So we already account for that in her cash flow forecast by being like, okay, we’re going to have to pay at least $5,000 in a credit card payment every single month. So we know that that’s coming up and we’re already relying on that. So you need to include your credit card almost as a line item if you are going to be having those expenses on there.

And then of course, one of the other biggest cash flow red flags is no separation between your personal and business. Those are mixed in. Your cash flow is going to look so wonky because you have just a bajillion things going on here, there, everywhere. You don’t actually understand what’s going on. So that’s another thing.

Now, another big red flag is, you know, just in general, expenses. And there’s a variety of red flags in expenses. So we’re going to do some kind of like mini red flags here. But of course there’s expense patterns that quietly drain your business. And we’ve talked about these before, and we’ve talked about what we kind of need to look at. But I think a lot of them, just spending, just spending like crazy and not actually analyzing and looking at your numbers. So similar to the cash flow, not knowing what’s coming in and just spending. So that’s one of them, obviously.

But I think a lot of the times the ones that are quietly draining our bank accounts are software, because, you know, if we’re not keeping track of software, we could have 70,000 software subscriptions that we don’t know about. Office expenses, meals, things like that. Meals is a huge one. So many of my clients don’t realize how much they spend on meals. And some of them are like, wait, why am I spending that much on meals? And some of them are like, that’s fine, that’s what I love doing, that’s fantastic.

Like I said before, if spending on food and stuff like that brings you joy because that’s what you love to do, you love to network, you love to be out with people, you love to do that, fantastic. But if you’re someone who’s like, oh my gosh, I didn’t realize I was spending that much on food, then obviously that’s something you need to be aware of.

How do you know if your spending is out of control? It’s similar to your cash flow. If your bank balance is dropping to zero, if you’re dropping to the negative, if you’re not able to cover all of your expenses, or if you have a bunch of things come in and you’re like, crap, I forgot about that, or something like that, that’s kind of a red flag when you know that your spending is out of control. Especially if you’re saying those words, “I forgot about that subscription.” That is definitely a big red flag.

So obviously you can also understand that by subscriptions and tools you forgot you’re paying for. So things that you just didn’t realize you were still paying for. Maybe you canceled Adobe six months ago and you’re like, why am I still paying for Adobe? Bringing that to light and understanding that. Your expense still going faster than your revenue. So when we look at your profit and loss, you have a higher expense ratio than your revenue. Now that doesn’t mean you’re dropping to zero. It’s just like maybe your percentage of your revenue or your expenses is higher than you want it to be. Maybe you’re spending 80% on expenses and you only have about 20% retainage, whatever that is.

And then you actually have no idea what your monthly overhead is. So similar to what I was talking about with the cash floor, figuring out what your monthly overhead is is vital. So figuring out what goes into your utility. And overhead, just to kind of describe a little bit about this, overhead is the number that is consistent every month. So obviously it can fluctuate a little bit. But if you know that you have these consistent expenses, whether that is software, whether that’s rent, whether that’s employees, things like that, that is your overhead for your business. So that is what you know is consistent, that’s going to come out every month. And that’s kind of what we build our cash flow on, right? So of course that’s another red flag.

Now, of course we can talk about all the money red flags and things like that, but we also need to talk about some like mindset and behavioral red flags that go on with our financials. So there are times that someone’s relationship with business finances is unhealthy, and that is avoidance. Obviously if you’re avoiding it, maybe you only do your finances once a year at tax time because you just don’t want to look at it. It’s a very unhealthy relationship and this is not me shaming you or saying anything like that. I want you to be able to grow your business and you can’t purposefully grow your business when you’re only looking at your finances once a year.

Because when you only look at them once a year and you look at them in June or you look at them in, sorry, if you look at them in April and you’re looking at them at the end of the year, you’re just looking at them to get them on your tax return. You’re not actually looking at them to fully understand the breadth and everything that goes into your business and how you can grow it, right? So that’s one sign, is obviously avoidance.

Another sign is only talking about revenue. Being like, “last year I made $100,000.” Okay. What was comprised of that $100,000? If I came up to you today and I asked you, “okay, you know, how much of that was expenses?” and you were like, “I have no idea,” that is a very unhealthy relationship with finances because you’re only looking at that top line number. You’re looking at the Stripe deposits and being like, “hey, I brought in 10 grand last month” and you’re not actually understanding what’s going on.

So obviously avoidance behavior shows different patterns, but avoiding looking at our numbers altogether is one of them. And that costs you a lot. It costs you knowing if you’re profitable. It costs you knowing what your expenses are. It costs you knowing if you could be changing something mid-year. Maybe you’re looking at your numbers and you’re like, oh, like I spent maybe you’re an Etsy shop owner and you’re like, I spent 40% on Etsy ads and that did nothing for my revenue. Maybe I need to slow that down and I can keep more in my pocket.

Knowing basic metrics like your profit margin or your effective hourly rate. Now we’ve talked about this before, our pricing is based on value pricing when we talk about pricing as a business owner. But you still need to have an effective hourly rate. So essentially a rate in mind that you are paying yourself hourly. You’re not telling anybody that hourly rate. That’s just like an idea behind what you’re doing. And not knowing what your profit margin is. And if you’re like, “Samantha, I have no idea what the frick a profit margin is,” friend, we’ve got tons of episodes on that and details that you can go into.

And then obviously making big financial decisions just on your gut feelings. So not actually fully understanding the breadth of these decisions. Again, like I mentioned, maybe you made an additional $5,000 this month and you’re like, I need a new desk, I’m going to go buy that new desk. And that new desk was like four grand. And you suddenly look at your business and you’re like, wait a second, could I have afforded that? And you can’t. So it’s definitely something you need to be thinking about, is just looking at those financial decisions.

Now, if you’re listening and you recognize these red flags in yourself and you’re like, oh my gosh, Samantha, that’s me, I’m that person, the first thing you should do is kind of analyze what I said, analyze what I said on these red flags, and then obviously get more visibility. I have tons of episodes on this. You can search it through the podcast and be able to find something. But if you’re looking at like a red flag, maybe you have an expense red flag, maybe the cash flow red flag, maybe you have a revenue red flag, whatever that red flag is, you can search through the podcast and dig up a little bit more information on this.

If you’re really like, I don’t even know where to start, feel free to send me a message on Instagram or shoot me an email. All my contact information is in the description box. So I’d love to hear from you. One of the things I’d love to say is, if you have one of these red flags, this is not a moment to put shame on yourself or to say, oh my gosh, I’m a terrible business owner, I don’t even know what I’m doing. These things happen.

There’s so much that goes on in our business from marketing to finances to operations to just a bajillion other things that we don’t know about, that we were not educated about. Running your business is so much more than you would ever plan. And I promise you it is. So if you have these red flags, don’t feel ashamed and don’t feel like, oh my gosh, I’m a terrible business owner, I can’t do anything right. You didn’t know. Take this as a sign that now that you do know, you need to either gain more education on these topics or you need to find someone to help you out with these topics. And that’s what I’m here for. If you need it, no pressure whatsoever.

As always you guys, if you liked this episode, please feel free to like it, share it, subscribe. I appreciate you guys so, so much for listening every week. As always, have the best week ever and we’ll see you next week. Farewell, fellow travelers.