THE BLOG
03/05/2013 04:07 pm ET Updated May 05, 2013

When to Stop Being Self-Employed

If you are self-employed, you know the meaning of hard work. According to Gallup.com, the average self-employed person works roughly 20% more than people who work for others. And 1 in 4 entrepreneurs work almost twice as much as the typical employee. Is it worth it? Not always. In fact, there are many instances where small business owners are shooting themselves in their own feet by being their own boss. They would be far better off working for someone else.

This became clear to me while I was talking with Gwen and her husband a few weeks ago. Gwen is a stay-at-home mom who also runs a small online business. The problem is that Gwen and her husband find it very difficult to make ends meet. They've accumulated a good chunk of credit card debt and unless things change quickly, the family finances aren't going to get any better.

After sitting down with the couple it became clear that Gwen needed to close up shop and find a good job. Unfortunately, she refused to even consider this possibility. That's too bad. Until she does, the family will be stuck in a financial lock down that won't lift. Let's make sure that doesn't happen to you.

Here's a check list to help you know when it's time to fold your business.

1. Track Profit

If you want to know if it's worthwhile to keep your doors open, you have to first understand how much profit you make at the end of each month. Sure you need positive cash flow. But it's not just about how much money you have in your business bank account at the end of each month.

In order to fully understand how profitable your business is, track your business expenses using a program like QuickBooks or the equivalent. No matter how small your business is, it's crucial that you separate your personal and business finances and track each one separately if you want to make your business thrive.

Once you see how much profit your company makes each month, divide that number by the number of hours you put in. That tells you your hourly rate. When we did the math we determined that Gwen's hourly rate was less than $7 per hour. Awkward.

2. Track Direction.

The next topic to consider is the direction of sales and profits. To really understand this, ask yourself a few questions:

  • Are sales and profits climbing or falling off a cliff?
  • Why?
  • If nothing changes, what is likely to happen to profits and sales over the next 2 to 5 years?
  • Can you do anything to change the situation?
  • What will it cost you in time and money in order to make these changes?
  • What is the likelihood that these changes will have the desired outcome? In other words...what is the risk?

Once you honestly answer these questions, you'll understand the long-term viability of your business. This is a crucial element to making your decision about staying in business or not.

3. What are your alternatives?

If Gwen was sitting at the top of the North Pole with no income alternatives, I could understand her position about holding on to her business at all costs. But Gwen wasn't frolicking among the polar bears and penguins on the icy wastelands of the north . Gwen was smack dab in the middle of Los Angeles. Better paying career opportunities were all around her even though she didn't see them.

Before you can objectively determine how wise it is to continue working for yourself, you have to see what else you could do with your time and how much you'd earn by doing so.

At the end of the day, it's simple (but not easy) to make the decision about self-employment vs working for someone else. My experience tells me that the emotions of the matter make this difficult. Being self-employed gives you freedom. Nobody tells you what to do. It can also give you a sense of success and accomplishment. I get it.

As I said in the beginning of this post, people who work for themselves usually work a lot more than those who have jobs. And some of these entrepreneurs (like Gwen) make a lot less than they other wise could. These people make it a lot harder on themselves by refusing to see the writing on the wall. They should figure out what their business is worth and sell it. End of story.

If you are a struggling business owner, look at your profits and the direction your company is headed in. Then consider your alternatives and make a decision. While you will probably feel a lot of emotion wrapped up in this process, try your best to keep those feelings aside when making this assessment. Closing down your business could be the smartest move you could make for yourself and your family.

Have you considered closing down your business? How did you decide what to do? What would you have changed about the process?