The One Piece Of Financial Advice I Wish I Knew Sooner

Aaron Hoos

If I could go back in time, that would be shocking.

But assuming I could do it, here’s the one piece of financial advice I wish I knew sooner:

Passive income is king.

I grew up in a household that believed in the value of hard work. My parents worked tirelessly to provide for my sister and I. (Thanks mom and dad!)

I appreciate the many great lessons I learned from them.

Unfortunately, there was one lesson that I wish I’d learned differently and if I could go back in time I’d tell myself this lesson:

(I’m not saying this to disparage my parents or their hard work; they were raised in households that taught them that lesson too.)

So, what is the better way?

THE BIG LESSON…

Your time is the most valuable commodity you have. It’s there one moment and gone the next. And, many people trade their time for dollars in a job. Unfortunately, when you do, that time is lost and you miss out on other ways you could have used that time.

Passive income allows you to continue making money without spending your time to do it, which gives you the freedom to use your time for other things… whether that’s spending time with family or whatever you want.

To illustrate, compare two people:

Person #1 works at a job. For simple math, let’s say they earn $50,000/year by working 40 hours a week. At the end of the year they’ll have “spent” 2,000 hours (40 hours a week for 50 weeks) to make that money.

Person #2 creates passive income. For simple math, let’s say they create something that earns them $10,000/year. They put in some hours and maybe a financial investment early in the year, and then this cash-flowing asset generates them money for the rest of the year with little or no additional input.

Let’s tally their results from the year:

Person #1 invested 2,000 hours and got $50,000 in return. They’ll never get that time back but they have money to spend.

Person #2 gave some up-front value (of time and money) and got $10,000 in return… but they also got 2,000 hours throughout the year.

… and that is the key. Because they can spend those 2,000 hours with family and enjoying life, but also building more passive income assets.

So, at first glance, Person #1 is financially better at the end of the first year but Person #2 has been able to enjoy (not sacrifice) their time PLUS they can use that time to create more cash-flow.

The following years will look much different:

Person #1 will continue to be trapped in a cycle of “spending” 2,000 hours to get $50,000. Although they were ahead in the first year, they are trapped in the same cycle the following years and largely dependent on raises or promotions to increase that annual income.

Person #2 is free. They can spend their free time each year creating assets that generate passive income, for which there is no ceiling; meanwhile, the time they have available can be spent on whatever they want. Simply put, Person #2 has way more options.

And at the end of their life?

Person #1 ends their working years and hopes they have saved up enough to live out their golden years.

Person #2 can retire (actually, they’ve lived a life of near retirement already) and their passive income assets continue to give them money through retirement.

PASSIVE INCOME CREATES FREEDOM AND OPPORTUNITY

That’s the financial lesson I wish I learned when I was younger: many people trade hours for dollars but you don’t get those hours back and you can end up trapped trading hours for dollars. The better choice is to build passive income to create freedom and to create more opportunities.

What kind of passive income can you create? Here are a few ideas:

I’m building all of these now, and I have been for a while. But I wish I’d known about the power and possibility of passive income sooner because it opens so many doors. It also gives options when things change: for example, when I was a lone freelance copywriter and I wanted to take a vacation, I’d put my clients on pause and go on vacation, then feel the financial pinch when I returned (since I didn’t earn any money while away). But now, thanks to passive income generated from the assets I have above, I don’t have to worry and I don’t have to dig into my savings to cover me until I’m generating income from clients again.

Wondering where to start? Start by figuring out something you do really, really well that other people want to know. Then capture that information in some way (such as a book or infoproduct) and make it available for sale, then market it to the right people. You may not make a fortune on that first thing but you’ll get a taste for the life-changing possibilities that come with passive income.

Even if someone else does the same thing you do and sells a solution for it already, you bring your own unique approach and personality to it. Start by building something and selling it for a low amount. Don’t try to get rich in one go. Sell it for a few bucks and learn from those sales; get testimonials and feedback, then improve and raise your prices.

SUMMARY

If you are wondering what the next few years of your life should look like, do yourself a favor and spend some of those years building passive income assets. You’ll get a taste of freedom and you’ll give yourself more options.

(Swipe-And-Deploy Template) How To Set Up The Financial Structure/Processes For Your Freelance Business

Aaron Hoos

Financials seem boring but they’re really not. They’re good practices that pay off in better decisions, more money, less stress, and extra time.

What’s not to love about that?!? Master your finances and you’ll master your business.

Problem is, a lot of people procrastinate on their financials because they think it is complicated and overly-detailed. However, it’s only complicated and overly-detailed if you procrastinate. But if you spend 2-3 minutes a week doing it, you’ll gain HOURS AND HOURS of time and save yourself a ton of frustration. That’s a lesson I wish I learned when I started.

For that reason, I want to help you by handing you the template for the financial structure and processes for your business.

This blog post contains the step-by-step instructions and a swipe-and-deploy financial structure/process template for freelancers who want to set up a good financial process for their businesses. It includes the step-by-step info in this blog post, plus a folder in Google Drive that you can download to duplicate for yourself.

THE BACKGROUND

I was recently working with a photographer who was just getting started. She’d reached out for help and we were talking about branding, marketing, list building, etc. Of course we were also talking about the important administrative side of it too, including financials. I had recommended a couple of books to her and sent her some financial resources but, in retrospect, I overwhelmed her with too much information.

I didn’t realize that at first until I followed up a week or so later and asked her how it was going. She admitted that she’d been procrastinating on the financial side to do other things in her business. Realizing that I’d overwhelmed her, I offered to set it all up for her.

After doing that, I replicated it here for you.

WHO IT’S FOR

I run a bunch of businesses but fundamentally I am a freelancer operating a sole proprietorship in Canada. So, these processes will probably work for other types of businesses and corporate structures, for larger sized businesses, and in other countries. However, this financial structure/process template is built for Canadian sole proprietor freelancers. It’s for new businesses that want to start on a strong foot with their financials, and it’s also for existing businesses that need to get a handle on their financials.

DISCLAIMER

This works for me. It may also work for you. However, you will probably need to make adjustments, depending on what you sell, your corporate structure, additional tax or reporting requirements, the country you operate out of, and many other factors. This is a starting point and you can build on it.

CONTENTS

This swipe-and-deploy financial structure template contains two things: (1) a Google Drive with downloadable templates for you, and (2) instructions that you can follow step-by-step.

(1) THE GOOGLE DRIVE FOLDER

There is a folder in Google Drive that you can view (and download). It’s a folder called “Financials” and inside are 3 things (pictured below)…

  • A Records folder
  • An Income and Expenses spreadsheet
  • An Invoice template

You can view and download this folder structure and upload it into your own Google Drive for a fast start to your own financial structure and processes

(2) STEP-BY-STEP INSTRUCTIONS

Whenever you need to invoice someone, do the following (total duration: 2 minutes):

  1. Right-click and duplicate the invoice template, renaming it the name of your invoice number.*
  2. Customize the contents of the invoice with their name, with their information.
  3. Download it as a PDF and email it to the customer.
  4. Keep it in the main folder.
  5. Put the information into your income/expenses spreadsheet (in the Income tab).

(* Keep your invoice numbers simple. I like using the year, month, and day in reverse order, plus the client’s initials, for very simple filing. For example, if my client is John Smith and I created the invoice on July 18, 2018, then the invoice number would be 20180718js. Nothing fancy, and I can tell at a glance when the invoice was made and who it was for.)

When customers pay, do the following (total duration: 30 seconds):

  1. Update your income/expenses spreadsheet (in the Income tab).
  2. Drag their invoice to the Records folder.*

(* Only drag PAID invoices to the Records folder. That way, anyone who hasn’t paid yet is front and center when you open the Financials folder and you can still see their invoices right away. The goal is to keep this clean by following up on receivables often. Don’t let unpaid invoices pile up!)

Every weekend… Yes, EVERY SINGLE WEEKEND… do the following (total duration: 2 minutes):

  1. Pull out the receipts of stuff you’ve bought that week for your biz. (Oh, pro tip: keep your receipts! Haha!)
  2. Enter the receipts into the income/expenses spreadsheet (in the Expenses tab).

Every year, in January-ish: (total duration: 5 minutes):

  1. Duplicate your income/expenses spreadsheet and rename it for the new year.
  2. Delete last year’s content from the new year’s spreadsheet so you are starting the year with a blank sheet.
  3. Drag the previous year’s spreadsheet into the Records folder.
  4. Go into the Records folder and create a folder for the year (so in January 2019 you will create a folder inside Records for 2018).*
  5. Drag all of 2018’s invoices plus the income/expenses spreadsheet into the 2018 folder.

(* After a few years of business you will end up with a bunch of folders year-by-year for every year you’ve been in business. If it gets to be too much, here’s an optional step: just create another folder in your Records folder called Archives and drag all previous year’s folders into your Archives folder. That way, you minimize the number of folders that you see when you open the Records folder.)

Every year, when doing your taxes*, do the following (total duration: 15 minutes):

  1. Go into the relevant year’s folder inside records and open the income/expenses spreadsheet.
  2. Record your total year’s income as “Business Income” in your tax return.
  3. Record your total year’s expenses (by category) as “Business Expenses” in your tax return.

(* Like everything else in this blog post, these points may differ depending on your corporate structure and the country you are operating in. However, the principles will be generally the same from one country to another.)

SUMMARY

That’s it. All built for you. It’s simple, and if you stay on top of it, it’s fast. Just download the Google Drive folders and put them in your own Google Drive, and bookmark this blog post and come back to it each week (and at the end of the year) to follow the steps to manage your financials.

The Small Business Financial Health Scorecard

Aaron Hoos

Your business might be making money, maybe even a lot of money… but that doesn’t mean it’s healthy. But keep reading because I’m sharing a Small Business Financial Health Scorecard that can instantly give you clarity to help you create a strong, profitable, money-making company that grows without stress.

But let’s start with the bad news…

THE BAD NEWS

The entrepreneurial graveyard is littered with companies that looked like they made money but were forced to shut down. To the uninitiated, it doesn’t make sense—how can a money-making company be forced to close its doors?!?

But those who have started businesses can tell you: a money-making business is not necessarily a healthy one. There are other financial factors, too. For example:

  • Maybe a business makes some money but not enough to survive on.
  • Maybe a business generates some revenue but its high expenses keep it from being profitable.
  • Maybe a business generates makes some money but its receivables are too high; it’s just not collecting enough of that money soon enough.
  • Maybe a business grows too fast and can’t get the money needed to buy the raw materials to assemble more of whatever it sells. (That one is surprisingly common, and, when combined with the receivables problem, it’s a business killer.)
  • Maybe a business generates a healthy income but the owner is so central to the income generation that they just can’t grow. (This was a problem in my business for a while.)

There are other financial reasons, too, but those are big problems. And they can be catastrophic.

So, how do you make sure that your company isn’t just making money but is actually healthy?

I’ve created this Small Business Financial Health Scorecard to review against your business. Use it to identify how healthy your company’s financials are and to get clarity on the ways you can create a financially healthier business.

SCORECARD OVERVIEW

Use the Small Business Financial Health Scorecard every quarter. (You may be tempted to use itmore often than quarterly but I think a quarterly effort gives you time to set goals, take action on those goals, and see results; whereas if you try to do it more frequently you’ll end up with a bunch of goals, too many actions to do, no time to do those actions, and no real results).

There are 7 key financial measures on the scorecard, and they describe how money is made, processed, and used in your business:

  1. Producing
  2. Processed
  3. Paid
  4. Propagating
  5. Predictable
  6. Profitable
  7. Passive

… in that order. (The order is important).

Here’s what they mean:

  1. Producing: Your business is generating revenue.
  2. Processed: Your business has systems in place to send invoices, follow up on receivables, process transactions, pay vendors, and pay taxes.
  3. Paid: Your business is actually collecting the money you are invoicing.
  4. Propagating: Your business grows and the money you are making grows as well.
  5. Predictable: Your business is bringing in money in a consistent way, ideally the same amounts on the same day of the week or month.
  6. Profitable: Your business generates more money than needed for all of the previous points of the scorecard, leaving extra money at the end of each month or quarter.
  7. Passive: Your business generates revenue without regular effort (perhaps best explained as a large, single up-front action that creates ongoing income, versus the need to trade hours for dollars).

SCORING

At the end of each quarter, go through each of these 7 points on the scorecard and score yourself. It will take less than five minutes but you’ll get a very clear picture of the financial health of your company, as well as some smart strategies to improve.

Here’s how to score yourself: For each one of the 7 financial health measures, give yourself a score from 0-4, as follows:

0 = “Nope”. (It does not happen at all.)
1 = “Not really”. (It happens some of the but time less than 50% of the time.)
2 = “Not always”. (It happens some of the time but less than 75% of the time.)
3 = “A lot”. (It happens most of the time but less than 100% of the time.)
4 = “Dialed in! (It happens 100% of the time, every single time, without fail.)

This is the other reason I recommend that you do this every quarter: you might have a really good month and score yourself a 4 on something in the month… but over a quarter it’s harder to sustain best practices so you get a better sense of how things are going on an ongoing basis.

So, let’s look at an example from a fictional company, just to see how the scorecard works:

  1. Producing: The company is generating revenue and the business is working at about 90% capacity, so they’d score a 3
  2. Processed: The company has some systems set up and is able to process most transactions, pay most bills easily, and usually pays taxes on time (but admittedly it’s not perfect), so they’d score a 3
  3. Paid: The company gets paid immediately so they don’t really have any receivable issues at all, so they’d score a 4
  4. Propagating: The company is is not growing so they’d score a 0
  5. Predictable: The company is making money but it comes in completely unpredictably so they’d score a 0
  6. Profitable: The company makes a bit of profit, on some things, but not a lot, so they’d score a 2
  7. Passive: The company’s money is completely tied to the amount of time that the owner spends in the company (and if the owner was away, no revenue would be generated, so they’d score a 0

Part of the value of the scorecard is that it balances simplicity with objectivity. In general, multiple people with the same level of awareness about a company should each be able to complete the scorecard and score roughly the same score, while also still keeping the scoring within a reasonable time-frame.

HOW TO ASSESS THE SCORE

When you score your company quarterly, you’ll assign a score to each one on a scale of 0-4. Ideally you’re aiming to have a company that hits 4 on each point (or, a mix of 3-4, which is probably more likely).

However, many companies won’t hit 3s and 4s across the board. Instead, there will be a variance. The scorecard will not only give you an overall picture of where you are weak and where you are strong, it will also help you to know what to work on first: once you’ve scored yourself, the next step is to find the “first lowest score” and work on that one for the quarter.

Here’s what I mean when I say the “first lowest score”: Starting from the top of the list (Producing) look down the list until you get to the financial measure with the lowest score. In the case of a tie, choose the one that comes earlier in the list. Let’s use the scoring example we’ve been running through so far…

  1. Producing = 3
  2. Processed = 3
  3. Paid = 4
  4. Propagating = 0
  5. Predictable = 0
  6. Profitable = 2
  7. Passive = 0

… then you start at Producing and go down the list, and you noticed that Propagating, Predictable, and Passive each share the lowest score (a score of 0). But, since Propagating is earlier in the list than the other two (it’s the first lowest score in the list) that’s the one you need to work on.

The reason is: you can theoretically work on any of the 7 points on the scorecard, whether a great score or a weak score, whether earlier in the list or later in the list, but the scorecard was put together in a strategic way that can help you build a stronger business by focusing on the earlier ones in the list first and dialing those in before moving on to the later ones, thus helping you build a strong foundation and then build a stronger business on that strong foundation.

HOW TO TAKE ACTION

Once you have found the first lowest score for the past quarter, create a simple action plan with a few achievable goals to improve that area. Here are some ideas:

  1. Producing: You need to work on your marketing and sales to get more customers coming through the door.
  2. Processed: You need to work on your systems and processes to make sure you can accept the money and pay your bills.
  3. Paid: You need to work on your invoicing and receivables to ensure that you are getting paid in a timely fashion.
  4. Propagating: You need to build a strong, self-funding growth plan.
  5. Predictable: You need to build marketing programs, promotions, and products, that bring in income regularly; you should also reach out to past customers especially during slow seasons.
  6. Profitable: Review your income and your expenses; look at how income increases and expense decreases will impact your financials.
  7. Passive: Build or invest in income-producing assets that “decouple” your time from your effort so that you can continue making money even if you are not working in your business.

Work on this action plan for the quarter and then score yourself again.

And again the next quarter.

And again the next quarter.

… and so on.

KEEP GOING

You’ll want to score yourself every quarter from now on, and keep those scorecards.

That way, you’ll create a baseline for the health of your company’s financials but you’ll also see how other changes in your business will impact your score. For example, perhaps you grow dramatically one quarter—that growth is great but could also break some of your invoicing systems and processes, so you may notice a higher score in Propagating and Profitability but a lower score in Processed or Paid. Constantly scoring yourself will keep you aware of the financial health of your business while also giving you a clear and simple strategy to growing a financially healthy company.

Consistent reporting on the financial health of your company with a clear plan on how to grow, all while keeping it simple. That’s the power of the Small Business Financial Health Scorecard.